When an investment decision has to be made for mutually exclusive projects and source constraints
A) the NPV rule prevails.
B) the IRR rule prevails.
C) the Payback rule prevails.
D) the ROA rule prevails.

Question

Quizplus · Accepted Answer

When investment decisions have to be made for mutually exclusive projects and source constraints (meaning limited resources), the best decision rule is the Net Present Value (NPV) rule. NPV takes into account the time value of money and considers all cash flows over the project's life. This allows for a direct comparison between projects and ensures that the project with the highest added value to the firm is selected. IRR and Payback rules can lead to incorrect investment decisions when the projects differ in their scale and timing of cash flows, while ROA is a measure of profitability and does not take into account the investment cost.

When an Investment Decision Has to Be Made for Mutually