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A Simulation Model of Capital Budgeting Under Uncertainty

Author

Listed:
  • Rodolfo C. Salazar

    (Pfizer, Inc., Korea)

  • Subrata K. Sen

    (University of Texas, Austin)

Abstract

This paper describes a simulation model of capital budgeting under uncertainty. It analyzes the effects of two types of uncertainty which influence the cash flows of the potential investment projects. Techniques of simulation and stochastic linear programming (using Weingartner's Basic Horizon model of capital budgeting) are employed to compute the expected return (with an associated measure of the risk involved) of different portfolios of projects. The manager can then select the portfolio which is closest to his personal risk-return preference. The model provides a practical guide to management in the entire process of project search, portfolio generation, and portfolio evaluation which characterizes the capital budgeting decision.

Suggested Citation

  • Rodolfo C. Salazar & Subrata K. Sen, 1968. "A Simulation Model of Capital Budgeting Under Uncertainty," Management Science, INFORMS, vol. 15(4), pages 161-179, December.
    • Handle: RePEc:inm:ormnsc:v:15:y:1968:i:4:p:b161-b179
    DOI: 10.1287/mnsc.15.4.B161
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    Cited by:

    1. Collan, Mikael, 2004. "Giga-Investments: Modelling the Valuation of Very Large Industrial Real Investments," MPRA Paper 4328, University Library of Munich, Germany.
    2. Thomas Hering & Johannes Schneider & Christian Toll, 2011. "Die simultane Investitions- und Finanzierungsplanungssimulation (SIPS) als heuristische Vorgehensweise auf dem unvollkommenen Kapitalmarkt unter Unsicherheit," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 21(4), pages 405-426, April.
    3. Christian Toll, 2018. "Zur Bewertung einer Unternehmensspaltung aus Sicht der Anteilseigner des zu spaltenden Unternehmens [Valuation of a Corporate Demerger from the Shareholders’ Point of View]," Schmalenbach Journal of Business Research, Springer, vol. 70(1), pages 155-204, March.
    4. Christian Toll & Olaf Kintzel, 2019. "A nonlinear state marginal price vector model for the task of business valuation. A case study: The dimensioning of IT-service companies under nonlinear synergy effects," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 27(4), pages 1079-1105, December.
    5. Christian Toll & Thomas Hering, 2017. "Valuation of Company Merger from the Shareholders’ Point of View," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 19(46), pages 836-836, August.

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