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Mutually exclusive projects occur when projects have uneven cash flows True False

Question:

Mutually exclusive projects occur when projects have uneven cash flows

True

False

Multiple Projects:

When a firm faces multiple projects, the appropriate method of capital budgeting depends on the natures of the project, and in particular whether projects are mutually exclusive. Profitability index, for example, is a better criteria than net present value when projects are mutually exclusive.

Answer and Explanation:

The statement is false.

Two projects are mutually exclusive when a firm cannot implement both simultaneously. This could occur, for example, because the firm has a limited capital budget, and therefore cannot fund all projects that are profitable. Whether two projects are mutually exclusive or not have nothing to do with the nature of the cash flows. Hence, the statement is false.


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