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What is the difference between Independent and Contingent Investments?
In finance and economics, investments have been categorized into various sectors. Independent and contingent investments are two broad subjects of investment decisions. Usually, there is no relation between independent and contingent decisions, but they may be considered two broad aspects of investments that determine the nature and characteristics of investments altogether.
As the names suggest, independent investments are independent in nature, while contingent investments are related to some other types of investment.
Independent investments are free from the influence of any other related investments. It is done singularly and executed for the benefit of the firm undertaking the investments.
Independent investments may include as many types of different investments as needed but all of them are free from the association of one another.
These investments do not need to be under one umbrella, but the profitability of a company from these investments are calculated together.
Independent investments also do not compete and can be used for completely different projects of a company.
For example, if an automobile company that manufactures light vehicles decides to produce heavy vehicles, it will have investments for both but each one will be unaffected by each other. Depending on the financial and manufacturing capability, each project may be done singularly without having to be influenced or affected by the other project.
Contingent investments are investments that are related to another capital project. Usually, one large project has numerous smaller projects needed to complete the principal one. In such cases, the large project needs to invest in the smaller ones to complete the project. These smaller investments are known as contingent investments.
Contingent investments are related to another project cannot be done singularly. Either the projects need to be completed at once or one project may be taken up after another, but they are related to one another in one way or the other.
For example, if you tend to create a heavy manufacturing plant in a remote area, you’d need to build roads for your company. This is an example of how contingent projects affect large ones. In this example, building the plant is the major investment, while building roads is a contingent investment.
Usually, large projects often have contingent projects, but this is not mandatory. There are many large projects that can be completed singularly without having to consider contingent projects and investments.
The costs associated with contingent investments are calculated together with the large projects. That is why, having contingent investments under one umbrella with the major investment is important.
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