Question

Discuss the choices available to a firm when it is faced with the dilemma of investing in only one project, but is considering several projects, ie, choice under mutually exclusive investments.

Answer 1

When the firm is faced with the dilemma of investing into one project, but it has multiple projects options then it should be adopting various kinds of capital budgeting methods in order to ascertain the best available method, so that it can deploy its money in the best available project and make the most out of it.

These are the choices which are available to the firm when there is a cluster of mutually exclusive projects which are available and hence the firm will be trying to accept those projects which will be providing the firm with the maximum rate of return and it will be trying to to maximize this rate of return by adopting of various methods like discounted payback period method and net present value method and internal rate of return method and equivalent annual annuity method.

These different type of method have different type of implications because various projects will be having equal lives, then we can adopt net present value along with internal rate of return and discounted payback period method but when we will be looking for various projects with unequal life then we will be adopting equivalent annual annuity method in order to select the best available project in order to maximize the rate of return of the company.

When faced with the selection during mutually exclusive project, the firm should be trying to maximize its rate of return by selecting the best possible project which is providing it with maximum rate of return.