In capital investment decisions, what principle suggests treating a project as independent?

The stand-alone principle is fundamental in capital investment decisions, as it dictates that each project should be evaluated based on its own merits and cash flows, without being affected by other projects or investments that a company may be undertaking. This approach allows decision-makers to isolate the specific risks and returns associated with that project, enabling an accurate assessment of its viability and financial impact.

By treating a project as independent, analysts can focus solely on the incremental cash flows that the project will generate, which is essential for understanding its contribution to overall corporate value. This principle ensures that an evaluation can be made without the biases and complexities introduced by other projects that may have different risk profiles or financial situations. Therefore, using the stand-alone principle is crucial for making informed capital investment decisions, ensuring that each project is considered on its own rather than as part of a larger portfolio.

The incremental cash flow principle also plays a significant role in project evaluation, but it emphasizes the additional cash flows generated rather than the independence aspect. Meanwhile, the risk assessment principle deals with measuring and managing the risk involved in an investment, and the opportunity cost principle focuses on the potential benefits of alternatives that are foregone. While these principles contribute to the investment decision-making process, the stand-alone principle specifically addresses the treatment