Question

Why is the stand-alone principle important in the analysis of capital projects, for a company like Best Buy?

Answer 1

Stand-alone in simpler words means one which is independent of other or standing in solitary. The principle of Stand-alone describes a firm or a division in the entity to be independent of the holding company and which analyses each of its project based on its performance.

Each unit acts a different firm whereby it has its own costs, revenue and risks. This principle helps to analyse the performace of each of these units in terms of their revenues, different projects undertaken, contribution in the main profist of the business. It also helps investors to make concrete decisions. Sometimes it may be possible that a diversified business may be doing well in some units of the business or some places of the business and may not be doing well in other parts.

For eaxmple: ITC has many division of products and produced at different locations of the world. The main business of producing tobacco may be hit by the government regulation in any country but its other division such as FMCG may be doing good in other country. This enables respective stakeholders to make better decisions based on FMCG stand alone positions. Or any any new projects undertaken by FMCG group may be widely beneficial based on the riska, costs and expenses of teh FMCG division of the ITC group.