A Capital Budgeting Decision Model with Subjective Criteria

Abstract

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, andd) 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.