Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-25T08:16:08.788Z Has data issue: false hasContentIssue false

Multiperiod Capital Budgeting under Uncertainty: A Suggested Application

Published online by Cambridge University Press:  19 October 2009

Extract

In recent years intensive work has been done applying the Sharpe-Lintner-Mossin Capital Asset Pricing Model to the multiperiod investment decision under uncertainty. The purpose of this paper is to develop a practical working procedure for use by the financial manager. We first develop the multiperiod capital budgeting decision criterion in a form that lends itself to application. Second, we propose a method of implementation, one that we have made operational in computer programs currently on the Columbia University computer system. This makes it possible to extend the evaluation to encompass typical capital budgeting problems which, until now, have been discussed only under certainty. In particular we deal with the case of capital rationing. We employ programming techniques for this analysis and interpret the meanings of the dual variables.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1977

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Baumol, William, and Quandt, Richard E.. “Investment and Discount Rates under Capital Rationing - A Programming Approach.” Economic Journal, vol. 75, no. 298 (June 1965), pp. 317329.CrossRefGoogle Scholar
[2]Bernhard, Richard H.Mathematical Programming Models for Capital Budgeting.” Journal of Financial and Quantitative Analysis, vol. 4, no. 2 (June 1969), pp. 111158.CrossRefGoogle Scholar
[3]Bierman, Harold Jr., and Hass, Jerome E.. “Capital Budgeting under Uncertainty: A Reformulation.” Journal of Finance, vol. 27, no. 1 (March 1973), pp. 119129.CrossRefGoogle Scholar
[4]Bogue, Marcus C., and Roll, Richard. “Capital Budgeting of Risky Projects with ‘Imperfect’ Markets for Physical Capital.” Journal of Finance, vol. 29, no. 2 (May 1974), pp; 601613.Google Scholar
[5]Brennan, Michael J.An Approach to the Valuation of Uncertain Income Streams.” Journal of Finance, vol. 28, no. 3 (June 1973), pp. 661674.CrossRefGoogle Scholar
[6]Carleton, Willard T.Linear Programming and Capital Budgeting Models: A New Interpretation.” Journal of Finance, vol. 24, no. 5 (December 1969), pp. 825833.CrossRefGoogle Scholar
[7]Cohen, Kalman J., and Elton, Edwin J.. “Inter-temporal Portfolio Analysis Based on Simulation of Joint Returns.” Management Science, vol. 14, no. 1 (September 1967), pp. 518.CrossRefGoogle Scholar
[8]Elton, Edwin J.Capital Rationing and External Discount Rates.” Journal of Finance, vol. 25, no. 2 (June 1970), pp. 573584.Google Scholar
[9]Fama, Eugene F., and Miller, Merton H.. The Theory of Finance. New York: Holt, Rinehart and Winston (1972).Google Scholar
[10]Hamada, Robert S.Portfolio Analysis, Market Equilibrium and Corporation Finance.” Journal of Finance, vol. 29, no. 1 (March 1969), pp. 1331.CrossRefGoogle Scholar
[11]Jensen, Michael C., and Long, John B. Jr.Corporate Investment under Uncertainty and Pareto Optimality in the Capital Markets.” Bell Journal of Economics and Management Science, vol. 3, no. 1 (Spring 1972), pp. 151174.Google Scholar
[12]Lintner, John. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, vol. 47, no. 1 (February 1965), pp. 1337.CrossRefGoogle Scholar
[13]Lintner, John. “Security Prices, Risk, and Maximal Gains from Diversification.” Journal of Finance, vol. 20, no. 4 (December 1965), pp. 587615.Google Scholar
[14]Litzenberger, Robert H., and Budd, Alan P.. “Corporate Investment Criteria and the Valuation of Risk Assets.” Journal of Financial and Quantitative Analysis, vol. 5, nos. 4 and 5 (December 1970), pp. 395419.CrossRefGoogle Scholar
[15]Merton, Robert C., and Subrahmanyam, Marti G.. “The Optimality of a Competitive Stock Market.” Bell Journal of Economics and Management Science, vol. 5, no. 1 (Spring 1974), pp. 145170.Google Scholar
[16]Mossin, Jan. “Equilibrium in a Capital Asset Market.” Econometrica, vol. 34, no. 4 (October 1966), pp. 768783.CrossRefGoogle Scholar
[17]Mossin, Jan. “Security Pricing and Investment Criteria in Competitive Markets.” American Economic Review, vol. 49, no. 5 (December 1969), pp. 749756.Google Scholar
[18]Mossin, Jan. “Security Pricing Theory and Its Implications for Corporate Investment Decisions.” Morristown, N.J.: General Learning Press (1972).Google Scholar
[19]Myers, Stewart C.A Note on Linear Programming and Capital Budgeting.” Journal of Finance, vol. 27, no. 1 (March 1972), pp. 8992.CrossRefGoogle Scholar
[20]Myers, Stewart C.Interactions of Corporate Financing and Investment Decision—Implications for Capital Budgeting.” Journal of Finance, vol. 27, no. 1 (March 1972), pp. 8992.CrossRefGoogle Scholar
[21]Salazar, Rudolfo C., and Sen, Subrata K.. “A Simulation Model of Capital Budgeting under Uncertainty.” Management Science, vol. 15, no. 4 (December 1968), pp. B–161B–179.CrossRefGoogle Scholar
[22]Sharpe, William F.Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, vol. 19, no. 3 (September 1964), pp. 425442.Google Scholar
[23]Stapleton, Richard C.Portfolio Analysis, Stock Valuation, and Capital Budgeting Decision Rules for Risky Projects.” Journal of Finance, vol. 26, no. 1 (March 1971), pp. 95117.CrossRefGoogle Scholar
[24]Stevens, Guy V. G.On the Impact of Uncertainty on the Value and Investment of the Neoclassical Firm.” American Economic Review, vol. 64, no. 3 (June 1974), pp. 319336.Google Scholar
[25]Stiglitz, J. E.On the Optimality of the Stock Market Allocation of Investment.” Quarterly Journal of Economics, vol. 86, no. 1 (February 1972), pp. 2560.CrossRefGoogle Scholar
[26]Van Home, James. “Capital-Budgeting Decisions Involving Combinations of Risky Investments.” Management Science, vol. 13, no. 2 (October 1966), pp. B–84B–92.CrossRefGoogle Scholar
[27]Weingartner, H. Martin. Mathematical Programming and the Analysis of Capital Budgeting Problems. Englewood Cliffs, N.J.: Prentice-Hall, Inc. (1963).Google Scholar
[28]Weingartner, H. Martin. “Capital Budgeting of Interrelated Projects: Survey and Synthesis.” Management Science, vol. 12, no. 7 (March 1966), pp. 485516.CrossRefGoogle Scholar
[29]Weingartner, H. Martin. “Criteria for Programming Investment Project Selection.” Journal of Industrial Economics, vol. 15, no. 1 (November 1966), pp. 6576.CrossRefGoogle Scholar