A unified solution in fuzzy capital budgeting

Abstract

Since the mid-1980s, both academics and practitioners have proposed and discussed various solutions in fuzzy capital budgeting. Based primarily on traditional capital budgeting methods, these solutions present the same problems as their respective deterministic methods: the implicit assumptions of the reinvestment rates; the possibility of multiple rates of return; and the possibility of anomalous behavior of the net present value method. This paper presents a unified solution in fuzzy capital budgeting based on modified deterministic methods proposed in the financial literature. This unified approach eliminates those problems and has the property of matching decisions on acceptance or rejection of investment projects with same life horizons and same scales and therefore maximize shareholder wealth. An insight is provided into the advantages of these investment project appraisal methods by comparing and contrasting them with traditional fuzzy methods. A comprehensive case study, based on an investment project on exploration of an oil field under both deterministic and fuzzy conditions, is included to illustrate the use of these methods. Due to the complexity of the calculations involved, new MS-Excel financial functions are developed, by using Visual Basic for Applications. The main contribution of this paper is the development of a unifying approach to capital budgeting under uncertainty that emphasizes the strengths of the modified methods, while bypassing the individual conflicts and drawbacks of the conventional capital budgeting methods. Results confirm that the proposed solution has many advantages over other capital budgeting methods.