Projects are said to be independent
if the accept/reject decision does not have any impact on the accept/reject decision of other projects. Projects are said to be mutually exclusive
if the acceptance of one project has any consequence upon the decision of another project. The latter case is the most often
seen as firms decide among several comparable options but is only going to select one of the options.
The NPV and IRR methods make the same accept/reject decisions for independent projects, but if projects
are mutually exclusive, then ranking conflicts can arise. If conflicts arise, the NPV method should be used due to the more
conservative or realistic reinvestment rate assumption. The NPV and IRR methods are both superior to the payback, but NPV
is superior to IRR.
Instead of calculating the MIRR, calculate both the NPV and IRR for each project. Practice setting the problems up using the formula and then using your calculator to find the NPV and IRR. The NPVX=$58.02 and IRRX=14.11%.
The NPVY=$39.94 and IRRY=15.62%. Project X has a
higher NPV but Project Y has a higher expected rate of return. The conflict is
a result of the reinvestment rate assumption. Select Project X because it adds
more value to the company.