Mutually exclusive projects
Mutually exclusive projects are investment alternatives where accepting one rules out the others, so a firm must rank them rather than accept or reject each on its own.
See it move
Project A costs €10,000, returns €13,200 in a year, and has an NPV of €2,000 and an IRR of 32%. Project B costs €50,000, returns €63,800, and has an NPV of €8,000 and an IRR of 27.6%. IRR ranks A first, but NPV ranks B first; because only one project can be taken, the firm should follow NPV and choose B.
Check yourself
A firm evaluating two mutually exclusive one-year projects at an 8% discount rate finds: Project X costs €20,000 and returns €23,760 in year 1 (NPV €2,000, IRR 18.8%); Project Y costs €45,000 and returns €52,920 in year 1 (NPV €4,000, IRR 17.6%). Which project should the firm choose?