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MBA – PM0012 : Classify projects based on the ways they influence investment decision process.

Posted on: March 2, 2012

MBA – PM0012 : Classify projects based on the ways they influence investment decision process.

Answer: – Investment projects are classified into three categories on the basis, of the way they influence the investment decision process: independent projects, mutually exclusive projects and contingent projects.

Independent projects

An independent project is one, where the acceptance or rejection does not directly eliminate other projects from consideration or affect the likelihood of their selection. For example, if management plans to introduce a new product line, as well as, replace a machine which is currently producing a different product. These two projects can be considered independent of each other, if there are sufficient resources to adopt both, provided, they meet the firm’s investment criteria.

Mutually exclusive projects

The mutually exclusive projects are projects that cannot be followed at the same time. The acceptance of one prevents the substitute proposal from accepting. Most of them have ‘either or’ decisions. You will not be able to follow more than one project at the same time. The evaluation is done on a separate basis so that one that brings the highest value to the company is chosen.

Contingent projects

A contingent project is one where the acceptance or rejection depends on the decision to accept or reject multiple numbers of other projects. Such projects may be complementary or substitutes. Let us take the example of bio fuel plant cultivation in a large scale and the decision to set up a bio fuel manufacturing unit. In this case, the projects are complementary to each other. The cash flows of the plant cultivation will be enhanced by the existence of a nearby manufacturing plant. Conversely, the cash flows of the manufacturing unit will be enhanced by the existence of a nearby cultivation farm.

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