CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A firm has two projects with positive net present values, but it can fund only one because both are competing for the same limited site. The relationship between the projects is best described as:
The projects are best described as mutually exclusive. Both need the same limited site, so accepting one rules out the other. Independent projects can be undertaken together, and contingent projects depend on another project being accepted, which does not describe this situation.
- Aindependent
- Bcontingent
- Cmutually exclusiveCorrect
Explanation
Projects are mutually exclusive when accepting one precludes accepting the other, here because they compete for the same site. Independent projects can be accepted together, and contingent projects require acceptance of another project. Capital rationing is a separate funding issue, so the site constraint defines the relationship.
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