In the case of mutually exclusive projects:
A) the financial manager is responsible for choosing the average of these alternatives since only one can be chosen; selecting one project requires the selection of the other.
B) they are to be evaluated based on their expected effect on shareholder wealth; the project that enhances shareholder wealth the most should be included in the firm's capital budget.
C) the financial manager is responsible for choosing the top three of these alternatives since only three can be chosen.
D) they are to be evaluated based on their past effect on shareholder wealth; all such projects that enhance shareholder wealth should be included in the firm's capital budget.

Question

Quizplus · Accepted Answer

When faced with mutually exclusive projects, the financial manager should evaluate them based on their expected effect on shareholder wealth. The project that enhances shareholder wealth the most should be included in the firm's capital budget. This approach ensures that the firm makes the best use of its resources and maximizes shareholder value. Choosing an average of the alternatives (A) or selecting a specific number of projects (C) are not appropriate methods for selecting mutually exclusive projects. Evaluating projects based on their past effect on shareholder wealth (D) is also not appropriate as past performance may not necessarily be indicative of future outcomes.

In the Case of Mutually Exclusive Projects