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#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Some project interactions:

  • Independent versus mutually exclusive projects. Mutually exclusive projects are investments that compete in some way for a company's resources - a firm can select one or another but not both. Independent projects, on the other hand, do not compete for the firm's resources. A company can select one or the other or both, so long as minimum profitability thresholds are met.

  • Project sequencing. How does one sequence multiple projects over time, since investing in project B may depend on the result of investing in project A?

  • Unlimited funds versus capital rationing. Capital rationing occurs when management places a constraint on the size of the firm's capital budget during a particular period. In such situations, capital is scarce and should be allocated to the projects most likely to maximize the firm's aggregate NPV. The firm's capital budget and cost of capital must be determined simultaneously to best allocate the firm's capital. On the other hand, a firm can raise the funds it wants for all profitable projects simply by paying the required rate of return.
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Subject 2. Basic Principles of Capital Budgeting
In a non-conventional cash flow pattern, the initial outflow can be followed by inflows and/or outflows. <span>Some project interactions: Independent versus mutually exclusive projects. Mutually exclusive projects are investments that compete in some way for a company's resources - a firm can select one or another but not both. Independent projects, on the other hand, do not compete for the firm's resources. A company can select one or the other or both, so long as minimum profitability thresholds are met. Project sequencing. How does one sequence multiple projects over time, since investing in project B may depend on the result of investing in project A? Unlimited funds versus capital rationing. Capital rationing occurs when management places a constraint on the size of the firm's capital budget during a particular period. In such situations, capital is scarce and should be allocated to the projects most likely to maximize the firm's aggregate NPV. The firm's capital budget and cost of capital must be determined simultaneously to best allocate the firm's capital. On the other hand, a firm can raise the funds it wants for all profitable projects simply by paying the required rate of return. Learning Outcome Statements b. describe the basic principles of capital budgeting; c. explain how the evaluat


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