Independent Project

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21 Aug, 2024

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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.

What is an independent project?

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.

Independent Project Explained

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 capi tal 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.

Examples

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.

Independent Project And Mutually Exclusive Project

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

Points of differentiation	Independent projects	Mutually exclusive projects
Meaning	Any group of projects, often known as independent or stand-alone projects, are those in which selecting one does not affect the choice of a different project from the group.	Any group of initiatives that cannot coexist if one is chosen is said to be mutually exclusive.
Decision arrival Method	In the case of independent project analysis, the decision rule only needs to determine whether a project is good or bad rather than ranking it as the best.	When there are mutually incompatible projects, the decision rule has to be able to rate which project is the best in addition to determining whether a project is good or bad.
Example	Introducing a new packaging method for the tablet "ABC" and improving existing medicine "XYZ's" effectiveness are two different projects for a pharmaceutical company. Here, both projects are not connected and can function independently without the company having to choose the best option.	A manufacturing company wants to upgrade its production unit, and a decision has to be made between two options. The first one is a unit that can last a decade, and the second option does not last a decade but is self-cleaning and saves a lot of water and power bills. Here the possibilities have different outcomes, and the business has to rank them according to their utility for the organization and then choose. Here, one has to be selected, not both; hence, they are mutually exclusive.

Frequently Asked Questions (FAQs)

What is the meaning of an independent project in capital budgeting?

Projects are categorized as either mutually exclusive or independent in capital budgeting. If one event's financial arrangement and success are not dependent on the success of another alternative, it is said to be independent.

How to become an independent project manager consultant?

Typically, the independent project manager oversees and leads projects from planning to completion. Like any employment, having the necessary education and relevant experience can enable someone to operate as an independent project manager.

What purpose does an independent project suppose to achieve?

The independent projects employ their resources, including money and property, to finish the project. It is simply to arrive at long-term investment decisions that can be implemented independently without relying on other projects.