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What is the difference between “independent” and “mutually exclusive” projects? |

Explanation

Independent projects are those projects which are not related to each other. Their cash flows do not depend on any other project. When choosing between two independent projects, their net present values should be considered. If both the projects have positive NPV, then both of them should be accepted as they will increase the value of the firm. However, if the NPV of one project is negative and of another is positive, the project with the positive NPV should be selected.

Mutually exclusive projects are those which are related to each other, but only one of them can be accepted. Therefore when a company needs to choose between two projects which are mutually exclusive, the company should choose the one with a positive NPV, and if both the projects have positive NPV, the one with the higher NPV should be chosen. However if both the projects have negative NPV, both of them should be rejected.

Verified Answer

Independent projects are those projects whose cash flows are not dependent on any other project. Whereas, mutually exclusive projects are those projects which are interrelated. It means that accepting one project will only be possible by rejecting the other alternative.

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