1.5 Independent versus Mutually Exclusive Projects
In making the evaluation of whether to accept or reject a proposed project, the analyst must keep in mind two matters:
- Whether the projects are independent or mutually exclusive
- The relevant decision rules, or “rules of thumb,” for accepting or rejecting a project
Independent Projects – If there are, say, just two projects under consideration, both, just one, or none of the projects may be accepted based on their separate, individual merits using the rules of thumb to be described below. The acceptance of one project has no bearing on the acceptance or rejection of another. There is both enough physical space and/or financial resources for both projects, if warranted.
Mutually Exclusive Projects – If there are, say, just two (competing) projects under consideration, just one or none of the projects may be accepted based on their relative merits. The acceptance of one project precludes the acceptance of the other. There may not be enough physical space and/or capital funds for both investment projects. If neither project meets minimal “metrics” (i.e., “rules of thumb”) no project may be accepted.
Imagine two potential investment projects, “A” and “B,” as below. The question is whether one may accept “A” or “B” or some other combination.
| Independent | Mutually Exclusive |
| A & B | Not both |
| A only | A only |
| B only | B only |
| Neither | Neither |
If the rule of thumb demands it, whether the projects are independent or mutually exclusive, you may reject both projects. You may only accept both if the projects are independent. If mutually exclusive, you may not be able to build two factories in the same space. Perhaps there will not be enough funds for both.