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The Net Present Value And The Optimal Solution Of Linear Programming In Investment Decisions

Author

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  • VESA Lidia

    (Doctoral School of Economic Sciences, Faculty of Economic Sciences, University of Oradea, Romania)

Abstract

This paper presents a comparison between the net present value (NPV) and the optimal solution of the linear program in order to offer an alternative perspective on the decision process. In the decision process, companies have to use more tools in order to make the right decision and to increase their values. So, using these two tools, namely, the net present value and the solution of the optimization problems, the companies will put together the expected benefits of the fixed asset investments and the available or potential resources. Using only one of these tools means that the company is oriented either to the future benefits of the fixed asset or to the investment capacity, with all technical or financial restrictions. The NPV is determined by using the standard formula while the optimal solution for the resource allocation is obtained by using the Simplex Algorithm and The Big M Penalty method. The comparison and combination of these indicators are used in the company's acquisition process and create some debates on the results in the acquisition process. The significant advantage of this paper is the improvement of the decision process in acquisitions by providing information from both the internal business environment and the external environment. Also, this comparison combines technical and financial information, which will make the decision of acquisition more reliable. There are some limits to this research. One limit is that it does not consider the possibility of delaying the investments since the NPV compares the now-investing to never-investing attitudes. Another limit is that the Simplex Algorithm offers a restrictive horizon of the decision since its components are expressed in positive integers. These two disadvantages may be discussed in further research, firstly, by appealing for the cost delay for making the right decision at the right time, and secondly, by using the fuzzy number in order to make the decisions in the fixed assets acquisition process more flexible. This last recommendation could replace the sensitivity analysis, which is a more complicated way to make the decision more flexible.

Suggested Citation

  • VESA Lidia, 2020. "The Net Present Value And The Optimal Solution Of Linear Programming In Investment Decisions," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 135-145, December.
    • Handle: RePEc:ora:journl:v:1:y:2020:i:2:p:135-145
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    File URL: http://anale.steconomiceuoradea.ro/volume/2020/n2/012.pdf
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    References listed on IDEAS

    as
    1. Aman Khan, 2019. "Fundamentals of Public Budgeting and Finance," Springer Books, Springer, number 978-3-030-19226-6, January.
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    More about this item

    Keywords

    net present value (NVP); investment; fixed assets; Simplex Algorithm; decision process; optimal solution;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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