Independent Project

An independent project refers to projects whose cash flows are not dependent on other projects. Therefore, its approval or disapproval is unrelated to the approval or disapproval of other projects. In other words, choosing one project does not affect other projects in the group.

Independent projects are a type of project that analysts and researchers classify under capital budgeting that allows them to work independently. It helps determine the extent of benefits an option could fetch over a long period. One may associate the concept with expenses related to the improvement of fixed assets and acquisitions through planned expenditures.

• An independent project is one whose approval or rejection is unrelated to the approval or rejection of other projects. It is sometimes referred to as a stand-alone project. 
• They are a type of capital budgeting project. It explains whether long-term investments made by a firm are worthwhile.
• In the case of its analysis, the decision rule only needs to determine whether a project is good or bad rather than ranking it as the best.
• The financial flows of independent projects are unaffected by those of other initiatives. Mutually exclusive projects, however, are different. When two initiatives are mutually exclusive, it indicates other ways to achieve the same goal.

An independent project is one whose approval or rejection is unrelated to the approval or rejection of other initiatives. One may sometimes refer to it as a stand-alone project. Companies often have multiple projects or plan to enhance their business from time to time. 

Consider two plans, A and B. The company can either choose plan A or plan B after careful consideration. In some cases, they can choose both. However, Plan A's funding, acceptance, or approval should be independent of plan B. This criterion makes these two plans independent of each other. When there are separate projects, the decision rule needs only to determine whether a project is good or bad; it is optional to rank which project is the best.

Projects are categorized as independent or mutually exclusive in capital budgeting. When a project's cash flows are not reliant on whether or not other alternative projects are accepted, it is said to be independent. In other words, independent projects are a type of project classification in capital budgeting, and in corporate finance, it explains whether long-term investments made by a firm are worthwhile. Building new facilities, purchasing new equipment, launching new goods, and merging with another company are all significant decisions that require capital budgeting.

Let us look at some examples of independent projects:

Example #1

There is a clothing company called Twenty-Four Forever. On the line of business development, they had two projects to consider. The first was introducing a new arrangement system for all their retail stores that would make customers spend more time in the store and make more options visible to them.

The second one is introducing a new order placement system for their online orders. Both are projects of different natures and independent of each other's purposes. One's funding and acceptance have no implications for the other. Therefore, they are both independent.

Example #2

Apple launched a few products at the Apple Event of 2022. One may treat product development or improvisations as different independent projects. One of the products Apple introduced was its 'Apple Watch Ultra,' which has certain specifications such as a 49-mm dial and sapphire glass that was added for 'extra durability.' Another product, 'AirPods Pro 2,' was launched at the same event. It is the company's latest wireless earbuds; it introduced its previous version in 2019.

The product came with many specifications, one of which was that it could give users up to six hours of listening. The company concentrated more on the battery capacity to develop this feature than any other component. Increasing the durability of a watch's dial and increasing battery capacity are highly likely to be different projects that would not influence the other's acceptance.

Let us see the difference between independent and mutually exclusive projects in the following table -

This article has been a guide to what is Independent Project. We explain the topic in detail with its examples and comparison with mutually exclusive projects. You may also find some useful articles here -

• Project Management
• Project Finance
• Independent Contractor