Hostname: page-component-84b7d79bbc-g5fl4 Total loading time: 0 Render date: 2024-07-28T21:09:32.834Z Has data issue: false hasContentIssue false
  • English
  • Français

A Capital Budgeting Decision Model with Subjective Criteria

Published online by Cambridge University Press:  19 October 2009

John J. Bernardo  and
Howard P. Lanser
Get access Rights & Permissions [Opens in a new window]

Extract

For decision makers, we emphasize that it is feasible to consider multiple subjective criteria in a capital budgeting problem. The applicability of the procedures outlined is enhanced by the limited data base necessary to obtain subjective rankings, remembering that here we are only concerned with side criteria.

In this paper, we have formulated the capital investment problem in a graph theoretic framework. We characterized the problem as being composed of a set of finite alternatives, a set of subjective criteria, and a set of resource constraints. This formulation leads to an integer programming problem in which the rankings of sets of alternatives on the multiple subjective criteria are aggregated into a single index. It is stressed that we used a single budgetary constraint in the example but that the procedure can accommodate additional constraints. We also assumed that management has specific side criteria and that it is possible for the decision makers to rank all alternatives for each of those criteria.

The application of the above procedure to any problem involves three steps:

1) From the decision maker, or groups of decision makers,

the agreement matrix π is developed. This involves:

a) defining the alternatives,

b) defining the side criteria,

c) asking management to rank each alternative under each criterion, and

d) if appropriate, asking management to weigh the relative importance of each of the side criteria.

2) From the technical considerations of the problem, determine the resource constraints. In our example, this included the investment requirements of each alternative and the total resources available.

3) Solve the problem as posed above as a group of m integer programming problems.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 2 , June 1977 , pp. 261 - 275
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

REFERENCES

[1]Arrow, K. T.Social Choice and Individual Values, 2nd ed.New York: John Wiley and Sons (1962).Google Scholar
[2]Baumol, W., and Quandt, R.. “Investment and Discount Rates under Capital Rationing—A Programming Approach.” Economic Journal (June 1965), p. 317.CrossRefGoogle Scholar
[3]Bernardo, John J. “A Linear Assignment Formulation of the Multi-Attributed Purchase Decision.” Journal of Business Administration, Vol. 7 No. 2 (May 1976).Google Scholar
[4]Charnes, A., and Cooper, W. W.. Management Models and Industrial Applications of Linear Programming. New York: John Wiley and Sons, Inc. (1961).Google Scholar
[5]Cochrane, James L., and Zeleny, Milan, eds. Multiple Criterion Decision Making. Columbia, S.C.: The University of South Carolina Press (1973).Google Scholar
[6]Hawkins, C., and Adams, R.. “A Goal Programming Model for Capital Budgeting.” Financial Management (Spring 1974), p. 52.Google Scholar
[7]Ijiri, Y.Management Goals and Accounting for Control. Chicago, Ill.: Rand McNally (1965).Google Scholar
[8]Johnsen, E.Studies in Multiobjective Decision Models. Lund, Sweden: Studenlitteratur (1968).Google Scholar
[9]Lee, Sang.Goal Programming for Decision Analysis. Philadelphia, Pa.: Auerback Publishers, Inc. (1972).Google Scholar
[10]Lee, S., and Jeno, A.. “Capital Budgeting for Multiple Objectives.” Financial Management (Spring 1974), p. 58.CrossRefGoogle Scholar
[11]MacCrimmon, K. R. “Decision Making among Multiple-Attribute Alternatives: A Survey and Consolidated Approach.” RAND Memorandum RM-4823-ARPA (1968).Google Scholar
[12]Osteryoung, Jerome S. “Multiple Goals in the Capital Budgeting Decision.” In Cochrane and Zeleny [5].Google Scholar
[13]Raiffa, H. “Preferences for Multi-Attributed Alternatives.” RAND Memorandum, RM-5868-DOT/RC (April 1969).Google Scholar
[14]Weingartner, H.Mathematical Programming and the Analysis of Capital Budgeting Problems. Englewood Cliffs, N.J.: Prentice-Hall, Inc. (1963).Google Scholar