PROGRAM CONSIDERS RELATIONSHIPS IN CAPITAL BUDGETING DECISIONS.

Victor Zaloom, Derchiang Li

Research output: Contribution to journalArticle

Abstract

A common problem encountered in business and industry is to select a subset of investment proposals to fund from a larger set of available proposals. This decision problem is generally referred to as 'capital budgeting. ' An investment alternative is defined as a subset of the set of investment proposals. There is a relationship between every pair of investment proposals. This article presents a program that considers four possible relationships: independent, strictly contingent, conditionally contingent, and mutually exclusive. The complete statement of a capital budgeting problem requires: a list of investment proposals and the cash flow associated with each; a knowledge of the relationship (mutually exclusive, independent, etc. ) between each pair of proposals; a statement of the budget limitation in year zero; a measure of merit and associated decision criterion. Common measures of merit are: net present value, annual worth, future worth, payback period, internal rate of return and benefit to cost ratio. The decision criterion for the program is to select the feasible alternative which maximizes net present value calculated using the minimum attractive rate of return.

Original languageEnglish
Pages (from-to)19-20, 21
JournalIndustrial Engineering
Volume16
Issue number8
Publication statusPublished - 1984 Aug 1

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All Science Journal Classification (ASJC) codes

  • Engineering(all)

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