Module 13A
CAPITAL BUDGETING FOR MUTUALLY EXCLUSIVE PROJECTS
OBJECTIVE:
In general, when two independent projects are evaluated using a discounted cash flow approach, the
Internal Rate of Return (IRR) and Net Present Value (NPV) methods will indicate identical accept or
reject decisions. However, when two projects are mutually exclusive, the two methods can give
inconsistent results. This program will determine if that is the case, and will compute the NPV and IRR
for each project and for the differential cash flows between the two projects. Additionally, it will display a
series of NPV's at different discount rates for each of the projects.
INPUTS (will appear in blue):
1) The cash outflows for projects A and B should be entered as negative
numbers in cells B47 and B49, respectively.
2) The cash inflows for projects A and B should be entered in cells
C47-H47 and C49-H49, respectively. Up to six cash flows can be
accommodated. The annual cash flows do not have to be uniform. If
there are fewer than six cash flows, leave the other cells blank.
3) The cost of capital should be entered (as a decimal) in cell D51.
GRAPH:
A graph will show if the NPV's for the two projects are equal at any
discount rate (cost of capital). To obtain the graph, enter five
discount rates in cells D76-H76. In cell C76, the discount rate is
zero. The five others should be in ascending order, with one of these
being the cost of capital. The intervals between the rates should be
identical. At the point where the two lines intersect, the two projects
have the same net present value. If the two lines intersect, then the
two measures will give inconsistent results if the cost of capital is
less than the rate at which they intersect. If the cost of capital is
higher than the rate at which they intersect, the two measures will
give consistent results. If the two lines do not intersect, then there
is no inconsistency between the two measures. Press GRAPH
located at bottom of screen.
NET PRESENT VALUE VERSUS INTERNAL RATE OF RETURN
Sample data have been entered as an example.
Project t=0 t=1 t=2 t=3 t=4 t=5 t=6
A -12000 3000 7000 8000
B -10000 5000 5000 5000
Cost of capital 10.0%

Internal Rate of Return
Project A 20.0%
Project B 23.4%
Net Present Value
Project A 2523
Project B 2434
Delta (differential cash flows)
(A-B) -2000 -2000 2000 3000 0 0 0
Net Present Value 89 Internal Rate of Return 11.2%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Project A 6000 4117 2523 1162 -9 -1024
Project B 5000 3616 2434 1416 532 -240

NET PRESENT VALUE PROFILES
7000
6000
5000
4000
Net Present Value
3000
2000
1000
0
-1000
-2000
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Discount rate
Row 78 Row 80

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