1. Give an example of a capital budgeting project that would be considered “independent”. Give an...

1. Give an example of a capital budgeting project that would be considered “independent”. Give an example of a capital budgeting project that would be considered “mutually exclusive”.

Expert Solution

The capital budgeting project that would be considered independent projects whose cash flows are not affected by accepting or rejecting the other projects. Therefore acceptance or rejection of project is solely depends on its own capital budgeting analysis and if all the projects in consideration fulfill the criteria, then all will be accepted. For example if the company is considering for 3 projects; first is for manufacturing TV, second is oil drilling and third is bakery project. If the company has sufficient fund for all three projects and all three are fulfilling company’s capital budgeting criteria and company has assumption that they are not going to affect each other’s cash flow, then company can accept all the three projects together as they are independent projects.

The capital budgeting project that would be considered mutually exclusive projects if they affect the cash flow of other projects and from a set of projects, at most one will be accepted. Mutually exclusive projects are generally a set of projects which are made to complete the same task. Therefore even if more than one project satisfy the capital budgeting criterion, then also only one project will be accepted which is best among them. Example of mutually exclusive projects is three different projects on manufacturing TV; in this case the company will accept only one option (the best option) based on its capital budgeting criteria.

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