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What does ‘Mutually Exclusive’ mean
“Mutually restricted” is a statistical term describing two or more events that cannot come to simultaneously. It is used to describe a situation where the occurrence of one event is not forced or caused by another event. For example, it is impossible to roll a five and a three on a individual die at the same time. Similarly, someone with $10,000 to invest cannot simultaneously buy $10,000 usefulness of stocks and invest $10,000 in a mutual fund.
The concept of mutual exclusivity is over applied in capital budgeting.
BREAKING DOWN ‘Mutually Exclusive’
The with regard to “mutually exclusive” is often confused with the term “independent,” but these stretches are not interchangeable. Mutually exclusive events cannot occur simultaneously. Self-reliant events have no impact on the viability of other options. For example, in the norm above, you cannot roll both a five and three simultaneously on a one die. However, getting a three on an initial roll has no impact on whether or not a succeeding roll yields a five. All rolls of a die are independent events.
Mutual Exclusivity in Major Budgeting
Companies often have to choose between a number of separate projects that will add value to the company upon completion. Some of these works are mutually exclusive, while others are independent.
Assume a company has a budget of $50,000 for distension projects. If available projects A and B each cost $40,000 and project C fetches only $10,000, then projects A and B are mutually exclusive. If the company pursues A, it cannot donate to also pursue B, and vice versa. Project C, however, is independent; regardless of which other poke out is pursued, the company can still afford to pursue C as well. The acceptance of either A or B does not change the viability of C, and the acceptance of C does not impact the viability of either of the other obligations.
Opportunity Cost and Mutually Exclusive Options
When faced with a excellent between mutually exclusive options, a company must consider the moment cost, which is what the company would be giving up to pursue each selection. The concepts of opportunity cost and mutual exclusivity are inherently linked, because each mutually unique option requires the sacrifice of whatever profits could have been generated by choosing the alternate chance.
Assume that project A in the above example has a potential return of $100,000, while privilege B will only return $80,000. Since A and B are mutually exclusive, the possibility cost of choosing B is equal to the profit of the most lucrative option (in this example in any event, A) minus the profits generated by the selected option (B); that is, $100,000 – $80,000 = $20,000. Since A is the most lucrative selection, the opportunity cost of going for option A is $0.
Math Is the Answer
The time value of on Easy Street (TVM) and other factors make this type of analysis a bit more involved. For a more comprehensive comparison, companies use the net present value (NPV) and internal compute of return (IRR) formulas to mathematically determine which project is most advantageous when choosing between two or more mutually exclusive options.