Classification of investment proposals :-

There are different types of capital projects. Project may be to install new plant and equipment or it may be to replace existing one. It may be to start a new business. There may be a number of independent projects as well as mutually exclusive projects. Some project may be dependent each other. In short there are varieties of projects and they are classified in the following categories:

i.                    Mutually exclusive investments – Mutually exclusive investments serve the same purpose & compete with each other. If one investment is undertaken, others will have to be excluded. Only one project is accepted among the mutually exclusive projects. For example if a cement factory is evaluating for truck or pulley system for bringing raw materials into factory then it can choose one from the alternatives. So, the company will choose the best one from the available alternatives.

ii.                  Independent investments – Independent investments serve different purposes & don’t compete with each other. In such a project, selection of one project does not affect the selection of other projects. In other words, approval of one project neither refutes another projects nor compels to approve it. That is independent projects are those projects whose cash flows are independent from one another. For example installation of brick factory and installation of sugar mill are independent projects. Approval or rejection of one project does not affect the decision process of other projects.

iii.                Contingent investments – Contingent investments are dependant projects, the choice of one investment will require that one or more other investments should also be undertaken. Decisions on contingent projects cannot be taken independently. For example construction of dam and cannel in a irrigation project.

iv.                Replacement projects: Sometimes due to the wear and tear, or due to the advent of new technology, existing machine or assets need to be replaced with new one. So, in replacement projects, serviceable equipment is replaced with new one.

v.                  Expansion  of the business: Expansion may be done in terms of  output of existing product, retail outlet or distribution channel. The available capacity may not be sufficient to meet the growing demand for the existing products. In such a case production capacity should be added to the existing one to meet the growing demand for the product. Similarly, management may expand its business in different geographical regions and open new outlets. All these projects fall under expansion projects.