This article identifies the problems in consistency of selecting mutually exclusive projects based on the NPV, while applying the BCR to project prioritization.
The NPV is recommended by Austroads (2005) and the Australian Transport Council (ATC 2006c) to be the most appropriate measure for selecting from mutually exclusive project options.
Therefore selecting the mutually exclusive project option with the highest NPV may not result in the socially optimal outcome if the opportunity cost of capital is uncertain and not entirely reflected by the discount rate.
Payback cannot evaluate mutually exclusive projects because it doesn't consider the whole project period--would it be better to accept a project with a longer payback period that provides higher returns after that point than to accept a project with a shorter payback period but lower returns?
Table 2 considers two mutually exclusive projects with different cash flow profiles.
2 Comparing two mutually exclusive projects using payback Project A Year Annual cash flow Cumulative cash flow 0 -[pounds sterling]25m -[pounds sterling]25m 1 [pounds sterling]16m -[pounds sterling]9m 2 [pounds sterling]12m [pounds sterling]3m 3 [pounds sterling]10m [pounds sterling]13m 4 [pounds sterling]8m [pounds sterling]21m 5 [pounds sterling]6m [pounds sterling]27m Payback: 1.
Whereas Cineaste may rationalize the controversy surrounding Lee's film by noting, "Malcolm X is not the sort of person Hollywood biopics normally celebrate" (Crowdus 4), Baldwin was not content to separate inclusion and transformation into mutually exclusive projects
When comparing among mutually exclusive projects, the highest NPV wins
NPV is typically better when comparing mutually exclusive project alternatives.
The course also discusses the project interaction situations such as capital rationing, mutually exclusive projects
, among others.
IRR has also been criticised because it doesn't always correctly evaluate mutually exclusive projects or ensure the best allocation of resources when capital rationing occurs.
MIRR will also produce the same investment recommendation as NPV, but it will not always ensure that the correct decision is made when there are mutually exclusive projects or, since it's a relative return, indicate the best allocation of funds when a company faces capital rationing.