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Equivalent Mathematical Programming Models of Pure Capital Rationing

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  • Bradley, Stephen P.
  • Frey, Sherwood C.

Abstract

In the applications of mathematical programming to the “pure capital rationing” problem, much of the attention has been focused on the search for an appropriate discount rate to account for the time value of money. The essential difficulty was first observed by Hirshleifer [10] in the classical economics context: “The discount rate to be used for calculating present values…cannot be discovered until the solution is attained, and so is of no assistance in reaching the solution.” Baumol and Quandt [1] showed that this problem persists in the Lorie and Savage [11] and Weingartner [15, Chap. 3] mathematical programming formulation and concluded that: “If there is capital rationing and external rates of interest are irrelevant, we cannot simultaneously insist on a present value formulation of the objective function and have the relevant discount rates determined internally by our program.” They then went on to propose an alternative utility formulation of the objective function.

Suggested Citation

  • Bradley, Stephen P. & Frey, Sherwood C., 1978. "Equivalent Mathematical Programming Models of Pure Capital Rationing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 345-361, June.
  • Handle: RePEc:cup:jfinqa:v:13:y:1978:i:02:p:345-361_00
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    Cited by:

    1. Helga Meier & Nicos Christofides & Gerry Salkin, 2001. "Capital Budgeting Under Uncertainty---An Integrated Approach Using Contingent Claims Analysis and Integer Programming," Operations Research, INFORMS, vol. 49(2), pages 196-206, April.
    2. Anabela Costa & José Paixão, 2010. "An approximate solution approach for a scenario-based capital budgeting model," Computational Management Science, Springer, vol. 7(3), pages 337-353, July.
    3. Bogdan Rębiasz, 2009. "A method for selecting an effective investment project portfolio," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 19(3), pages 95-117.

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