13.3: Independent and Interdependent Projects Flashcards
Analyze independent projects and explain how they differ from interdependent projects
What are independent projects?
Independent projects have no relationship with one another. Accepting one project has no impact on the decision to accept another project.
What are interdependent projects?
Interdependent projects are related such that accepting or rejecting one has an impact on the value of other projects under consideration.
What are contingent projects?
Contingent projects are projects for which the acceptance of one requires the acceptance of another either beforehand or simultaneously.
What are mutually exclusive projects?
Mutually exclusive projects are projects in which the acceptance of one precludes the acceptance of one or more alternative projects.
What is the chain replication approach?
The chain replication approach is a way to compare projects with unequal lives by finding a time horizon into which all the project lives under consideration divide equally and then assuming each project repeats until it reaches this horizon.
What is the equivalent annual NPV (EANPV) approach?
The equivalent annual NPV (EANPV) approach is a way to compare projects by finding the net present value of the individual projects and then determining the amount of an annual annuity that is economically equivalent to the NPV generated by each project over its respective time horizon.
How do you compare projects with the chain replication approach?
Calculate the NPV of each project over their individual time horizons, then assume the projects are replicated to a common time horizon. Choose the project with the highest total NPV over the common time horizon.
How do you calculate the EANPV for projects with NPVs of $623.82 and $816.13, respective time horizons of 2 and 3 years, and a discount rate of 15%?
EANPV_A = $623.82 / 1.625709 = $383.72.
EANPV_C = $816.13 / 2.283225 = $357.45.
Choose the higher one
