1. Mutually Exclusive Alternative Analysis
The Rate of Return or Growth Rate of Return: With either regular ROR or Growth ROR analysis of mutually exclusive alternatives, you must evaluate both total investment ROR and incremental investment ROR, selecting the largest investment for which both are satisfactory. Use a common evaluation life for Growth ROR analysis of unequal life alternatives, normally the life of the longest life alternative assuming net revenues and costs are zero in the later years of shorter life alternatives.
Net Value Analysis: With NPV analysis, you want the mutually exclusive alternative with the largest net value – because this is the alternative with the largest investment that has both a positive total investment net value and a positive incremental net value compared to the last satisfactory smaller investment.
2. Non-Mutually Exclusive Alternatives
The Rate of Return or Growth Rate of Return: Regular ROR analysis cannot be used to consistently rank non-mutually-exclusive alternatives. Use Growth ROR, and rank the alternatives in the order of decreasing Growth ROR. This will maximize profit from available investment capital. Use a common evaluation life for Growth ROR analysis for unequal life alternatives, normally the life of the longest alternative.
Net Value Analysis: With NPV analysis of non-mutually exclusive projects, select the group of projects that will maximize cumulative net value for the dollars available to invest. This does not necessarily involve selecting the project with the largest net value on individual project investment.
Reminder - Complete all of the Lesson 4 tasks!
You have reached the end of Lesson 4! Double-check the to-do list on the Lesson 4 Overview page to make sure you have completed all of the activities listed there before you begin Lesson 5.