Project Interactions Side Costs And Side Benefits

In much of our discussion so far, we have assessed projects independently of other projects that the firm already has or might have in the future. Disney, for instance, was able to look at the theme park investment and analyze whether it was a good or bad investment. In reality, projects at most firms have interdependencies with and consequences for other projects. Disney may be able to increase both movie and merchandise revenues because of the new theme park in Bangkok and may face higher advertising expenditures because of its Asia expansion.

In this chapter, we examine a number of scenarios in which the consideration of one project affects other projects. We start with the most extreme case, where investing in one project leads to the rejection of one or more other projects; this is the case when firms have to choose between mutually exclusive investments. We then consider a less extreme scenario, where a firm with constraints on how much capital it can raise considers a new project. Accepting this project reduces the capital available for other projects that the firm considers later in the period and thus can affect their acceptance; this is the case of capital rationing.

Projects can create costs for existing investments by using shared resources or excess capacity, and we consider these side costs next. Projects sometimes generate benefits for other projects, and we analyze how to bring these benefits into the analysis. In the final part of the chapter, we introduce the notion that projects often have options embedded in them, and that ignoring these options can result in poor project decisions.

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