Hostname: page-component-7b7567c8c-tnzcf Total loading time: 0 Render date: 2026-11-14T08:31:36.657Z Has data issue: false hasContentIssue false
  • English
  • Français

Equivalent Mathematical Programming Models of Pure Capital Rationing

Published online by Cambridge University Press:  06 April 2009

Stephen P. Bradley and
Sherwood C. Frey Jr
Get accessRights & Permissions [Opens in a new window]

Extract

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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 2 , June 1978, pp. 345 - 361
Copyright
Copyright © School of Business Administration, University of Washington 1978

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.)

Article purchase

Temporarily unavailable

References

REFERENCES

[1]Baumol, William J., and Quandt, Richard E.. “Investment and Discount Rates under Capital Rationing--A Programming Approach.” The Economic Journal, Vol. 75, No. 298 (06 1965), pp. 317–329.CrossRefGoogle Scholar
[2]Bernhard, Richard H. “Mathematical Programming Models for Capital Budgeting--A Survey, Generalization, and Critique.” Journal of Financial and Quantitative Analysis, Vol. 4, No. 2 (06 1969), pp. 111–158.CrossRefGoogle Scholar
[3]Bessiere, Francis. “The ‘Investment '85’ Model of Electricite de France.” Management Science, Vol. 17, No. 4 (12 1970), pp. B-192–211.Google Scholar
[4]Bower, Joseph L.Managing the Resource Allocation Process, Division of Research, Graduate School of Business Administration, Harvard University (1970).Google Scholar
[5]Bradley, Stephen P.; Frank, Ronald S.; and Frey, Sherwood C. Jr, “Determining Appropriate Discount Rates under Pure Capital Rationing.” Forthcoming in Decision Sciences.Google Scholar
[6]Burton, R. M., and Damon, W. W.. “On the Existence of a Cost of Capital under Pure Capital Rationing.” The Journal of Finance, Vol. 29, No. 4 (09 1974), pp. 1165–1173.CrossRefGoogle Scholar
[7]Carleton, Willard R. “Linear Programming and Capital Budgeting Models: A New Interpretation.” The Journal of Finance, Vol. 24, No. 5 (12 1969), pp. 825–833.CrossRefGoogle Scholar
[8]Chambers, David. “The Joint Problem of Investment and Financing.” Operational Research Quarterly, Vol. 22, No. 3 (09 1971), pp. 267–295.CrossRefGoogle Scholar
[9]Elton, E. J. “Capital Rationing and External Discount Rates.” The Journal of Finance. Vol. 25, No. 3 (07 1970), pp. 573–584.Google Scholar
[10]Hirshleifer, J. “On the Theory of Optimal Investment Decision.” Journal of Political Economy, Vol. 66, No. 4 (08 1958), pp. 329–352.CrossRefGoogle Scholar
[11]Lorie, J. M., and Savage, L. J.. “Three Problems in Capital Rationing.” The Journal of Business, Vol. 27, No. 4 (10 1955), pp. 229–239.CrossRefGoogle Scholar
[12]Lusztig, P., and Schwab, B.. “A Note on the Application of Linear Programming to Capital Budgeting.” Journal of Financial and Quantitative Analysis, Vol. 3, No. 5 (12 1968), pp. 427–431.CrossRefGoogle Scholar
[13]Myers, Stewart C. “A Note on Linear Programming and Capital Budgeting.” Journal of Finance, Vol. 27, No. 1 (03 1972), pp. 89–92.CrossRefGoogle Scholar
[14]Shank, John K., and Burnell, A. Michael. “Smooth Your Earnings Growth Rate.” Harvard Business Review, Vol. 52, No. 1 (01–02 1974), pp. 136–141.Google Scholar
[15]Weingartner, H. Martin. Mathematical Programming and the Analysis of Capital Budgeting Problems, Englewood Cliffs, N.J.: Prentice-Hall, Inc. (1963).Google Scholar
[16]Weingartner, H. Martin. “Capital Budgeting of Interrelated Projects: Survey and Synthesis.” Management Science, Vol. 12, No. 7 (03 1966).CrossRefGoogle Scholar
[17]Weingartner, H. Martin. “Capital Rationing: n Authors in Search of a Plot.” The Journal of Finance, Vol. 32, No. 5 (12 1977), pp. 1403–1432.Google Scholar