mutually exclusive

(adjective)

Describing multiple events or states of being such that the occurrence of any one implies the non-occurrence of all the others.

Related Terms

Examples of mutually exclusive in the following topics:

  • Disadvantages of the IRR Method

    • IRR can't be used for exclusive projects or those of different durations; IRR may overstate the rate of return.
    • The first disadvantage of the IRR method is that IRR, as an investment decision tool, should not be used to rate mutually exclusive projects but only to decide whether a single project is worth investing in.
    • In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders' wealth) and should thus be accepted over the second project (assuming no capital constraints).
    • NPV vs discount rate comparison for two mutually exclusive projects.

  • Opportunity Costs

    • Opportunity cost refers to the value lost when a choice is made between two mutually exclusive options.
    • In other words, it is the sacrifice of the second best choice available to someone, or group, who has picked among several mutually exclusive choices. .
    • Opportunity cost is a key concept in economics; it relates the scarcity of resources to the mutually exclusive nature of choice.

  • Multiple IRRs

    • However, when comparing mutually exclusive projects, NPV is the appropriate measure.

  • Reinvestment Assumptions

    • As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects but only to decide whether a single project is worth the investment.
    • In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return) but a higher NPV (increase in shareholders' wealth) and, thus, should be accepted over the second project (assuming no capital constraints).

  • Defining Capital Budgeting

    • The IRR method will result in the same decision as the NPV method for non-mutually exclusive projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows.
    • Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR, which is often used, may select a project with a lower NPV.

  • Call Provisions

    • Since call option and put option are not mutually exclusive, a bond may have both options embedded.

  • Ranking Investment Proposals

    • In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.

  • Investment Institutions

    • Investment institutions include mutual funds and finance companies.A mutual fund manager groups together funds from many investors and invests the money in a variety of stocks.Consequently, a mutual fund diversifies stocks, and it lowers investors' risk.For example, you start your own mutual fund and offer investors a chance to invest in this fund.You take the money and buy 30 different corporate stocks.The Coca-Cola stock rises one day while the value of IBM stock falls.Overall, the average of the fund's 30 stocks should earn a return to your fund and to the investors.If you bought only Kmart corporate stock, you would lose your investment if this company bankrupts.
    • Mutual fund companies have different strategies and characteristics, and well-known mutual fund companies include Fidelity, Vanguard, and Dreyfus.Mutual fund companies develop strategies where they only buy stock in certain industries, large companies, or foreign company's stock.Furthermore, the mutual fund company may issue a fixed number of shares to the fund that we call closed-end mutual funds.Then investors may buy and sell these shares inover-the-counter markets, just like stock.Thus, the mutual fund company does not buy its shares back for closed-end mutual funds.A mutual fund company may offer another alternative called open-ended mutual funds.Mutual fund company can buy back shares to the fund, and the price of the shares becomes tied to the value of the stock in the fund.Finally, the mutual fund managers use two methods to earn profits.First, fund managers charge management fees for no-load funds, usually 0.5% of asset value.For the second method, the fund managers charge a commission for selling or purchasing of shares for load funds.The load reflects the commission that lowers the fund's value.
    • Money-market mutual funds are similar to mutual funds.However, the fund manager buys only money market securities, and the fund excludes corporate stock.Theory behind money-market mutual funds is simple.If you have five friends with $2,000 each, and they want to buy a Treasury bill with a minimum face value of $10,000, then your friends can pool their money together and buy one T-bill.Once the T-bill matured, your friends split the interest among themselves.
    • Money-market mutual funds are very popular because these funds offer check-writing privileges, and some investors do not want to tie up their funds for a long time.Moreover, the value of the fund does not change much, when interest rates changes because money market securities have maturities less than one year.In 2008, money-market mutual funds had assets of $3.8 trillion.
    • Commercial banks offer money market deposit accounts that are similar to the money-market mutual fund.Two funds differ because the Federal Deposit Insurance Corporation (FDIC) insures the money market deposit accounts, while it does not insure money-market mutual funds.If your bank bankrupted and you invested in money market deposit accounts, subsequently, you are guaranteed not to lose you funds up to the maximum insured amount.

  • The Common Financial Instruments

  • Market Actors

    • Market actors include individual retail investors, mutual funds, banks, insurance companies, hedge funds, and corporations.
    • Insurance companies are generally classified as either mutual or proprietary companies.
    • Hedge funds are not considered a type of mutual fund.
    • There are three types of U.S. mutual funds: open-end, unit investment trust, and closed-end.
    • As of 2007, index funds made up over 11% of equity mutual fund assets in the United States.