Flotation Costs
Flotation costs are expenses that are incurred by a company during the process... Read More
Several project interactions make the incremental cash flow analysis very challenging for analysts. Specifically, the evaluation of capital projects, as well as their selection, may be greatly affected by the extent to which there are mutually exclusive projects and project sequencing and capital rationing occur.
Mutually Exclusive Projects
Mutually exclusive projects are capital projects which compete directly with each other. For example, if a manager has to make a choice strictly between undertaking either project X or Y, but not both of them concurrently, then projects X and Y are said to be mutually exclusive. This scenario differs from independent projects. These are projects whose cash flows are independent of each other and can, therefore, be undertaken concurrently.
Project Sequencing
The purpose of project sequencing is to arrange projects in a logical order for completion. It enables a project manager to determine the order in which projects are completed. Indeed, project sequencing helps in proper and effective management of the available time and resources.
Through project sequencing, investing in one project may create room for investment in future projects. For example, a manager may invest in one project today and then invest in another project in a year depending on the returns from the first project or if new economic conditions are favorable.
Capital Rationing
Capital rationing is the act of placing restrictions on the amount of new investments or projects that a company can undertake. It may occur either through the imposition of a higher cost of capital for investment consideration or by the imposition of an investment budget ceiling.
Capital rationing is more frequent whenever a company has a fixed amount of funds available for investment. However, if the number of profitable projects a company wishes to invest in exceeds the available funds, then the company will be forced to allocate these scarce funds in a manner that achieves maximum shareholder value subject to the funding constraints.
The opposite of capital rationing occurs whenever a company has unlimited funds. In this situation, a company can raise the required funds for all profitable projects simply by paying the required rate of return.
Question
Which of the following is an accurate example of mutually exclusive projects?
A. A manager can choose to invest in both projects A and B at the same time.
B. A manager can choose between investing in either project A or B, but not both.
C. A manager can choose to invest in project A first and then invest in project B shortly after the start of project A.
Solution
The correct answer is B.
Option B accurately describes two mutually exclusive projects.
A and C are incorrect because in both instances, two projects being invested in concurrently. Once two projects are mutually exclusive, you cannot invest in both at the same time.
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.