Mutually Exclusive Investment

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Mutually Exclusive Investment

An investment that prevents one from making a different investment. Some investments are mutually exclusive by nature; for example, taking a long position in a stock precludes taking a short position in the same stock at the same time. Others are mutually exclusive circumstantially; for example, if one only has so much money to invest and buys stocks A, B, and C, there may not be enough left over to buy stock D. See also: Opportunity cost.

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There are mutually exclusive investments because only one of the alternatives proposed will be built.

Major links between economic and technical practice

When evaluating mutually exclusive investments or comparing any two or more investments to determine the better or best among the alternatives, the traditional NPV and IRR evaluation methods are up to the task, but they must be applied incrementally.

The basic premise behind the incremental analysis is that, when one is selecting between two mutually exclusive investments (e.g., B and D), the mutually exclusive project involving the larger initial outlay (D) can be evaluated as if it were a package of two separate projects.