Final answer:
When evaluating mutually exclusive projects with similar lives, the best decision is to pick the project with the highest NPV, akin to consumer choice theory where a consumer maximizes utility by ensuring the marginal utility per dollar spent is equal across all goods.
Step-by-step explanation:
When choosing among mutually exclusive projects with similar lives, it is generally correct to choose the project with the highest NPV (Net Present Value) as long as at least one project has a positive NPV. This decision rule aligns with the objective of maximizing shareholder wealth in corporate finance.
However, it is worth noting that when applying the NPV rule, the assumption is made that the projects are comparable in terms of scale and timing of cash flows, among other factors. To draw parallels with consumer choice theory in economics, consider the concept of utility maximization.
Consumers allocate their budget to various goods in a way that the marginal utility per dollar spent is equal across all goods. This concept ensures that the consumer is getting the most satisfaction from their spending given their limited budget and the prices of the goods.
Similarly, in the context of project selection, by choosing the project with the highest NPV, the company is effectively getting the highest return per dollar invested. After exhausting the budget on available projects, a state of equilibrium would be reached where the marginal utility per dollar spent would be equal across all selected investments, if all projects were divisible and could be partially funded.
Yet, in the case of mutually exclusive projects, the decision is made once, and the project with the highest NPV is expected to provide the best economic return, assuming all other factors are equal and no constraints other than budget are present.