Capital Budgeting Model Research Articles

A Model of Interdependent Capital Budgeting and Financing Decisions Under Uncertainty

A Model of Interdependent Capital Budgeting and Financing Decisions Under Uncertainty

Consumer Valuation of Life Insurance. A Capital Budgeting Approach

The Capital Budgeting Approach has been suggested as a method whereby the consumer may estimate the cost of his life insurance, by several authors. Many cost methods include parts of a formal capital budgeting model. But none to date has treated the purchase of life insurance as a pure capital budgeting decision. This article takes the consumer's viewpoint. Assumptions of lapse are not relevant to the consumer because he faces a lapse rate of one or zero in each year depending on whether he pays his premium. For life companies, lapse rates are vital to calculate an asset share accurately. The result of the Capital Budgeting Approach is a cost method that is more easily understood by both the consumer and the agent and that fairly reflects company decisions relative to high early cash values and dividends. The value of a life insurance policy to the consumer has been a difficult concept for years. This paper analyzes the life insurance policy as a series of cash and opportunity cash flows. Capital budgeting techniques are applied to the flows in the life insurance contract to reveal for insureds a comparative value of insurance in terms of rates of return and net present values. Requisites For Cost Method Any system of life insurance cost (value) comparisons should be simple. The primary method of dissemination of cost information to the public is through life insurance agents. Agents acquire information from trade sources. In order that accurate information may be transmitted, it must be simple to survive the round-about communication process from calculation to consumer. A second goal in a cost comparison system is to reflect the time value of money. From the consumer's viewpoint, a life insurance policy is a conPeter R. Kensicki, D.B.A., C.L.U., is Assistant Professor of Finance at Ohio University. Formerly with the Georgia Department of Insurance, Dr. Kensicki is a Trustee of the Griffith Foundation for Insurance Education and is Chairman of the Board of Trustees of the Institute for Research Studies, Inc. This paper was submitted in September, 1973. The author wishes to thank the many people who have contributed their time and talent to reading and suggesting changes in this paper. While there are too many to list all, a special thanks is given to Harry Blythe, Professor of Finance, Ohio State University.

Abstract--Intertemporal Cash Flows in Capital Budgeting Decisions

This paper examines the problem of including intertemporally dependent cash flows in capital budgeting models under uncertainty, including review of previous efforts to resolve this problem. The difficulty involved in estimating autocorrelation coefficients and the magnitude of the error introduced by assuming independence are discussed.

Borrowing and Lending in a Mathematical Programming Model of Capital Budgeting

Weingartner, in 1963, published his solution to the Lorie and Savage problem of choosing the optimal combination of projects given that capital rationing occurs in more than one period. This paper discusses the rationale of the Weingartner model and develops a systematic way of treating lending. Indeed not to include lending can lead to sub‐optimal results. Borrowing is then included into the model at the cost of making certain restrictive assumptions.

Duality Results for Discrete Capital Budgeting Models

ABSTRACT The application of linear and non-linear programming duality theory to capital budgeting models had resulted in the identification of various properties of optimal solutions and has provided economic interpretations of the models. This paper illustrates that similar results may be obtained for discrete capital budgeting models by applying recent advances in duality theory for integer programming problems (1), (2), and (3).In addition, a dual solution method is developed that permits a degree of decentralization of a firm's capital budgeting decision.

CORPORATE INVESTMENT, DIVIDENDS, AND FINANCE: A SIMULTANEOUS APPROACH*

IN THIS WORK a model of corporate capital budgeting is developed and estimated. The most important feature of this model is its explicit recognition of the interdependence among the components of a capital budget. The capital budgeting decision in any period consists of choosing the level of investment for the corporation and the means of financing that investment. A fundamental accounting identity insures that the level of investment is always equal to the sum of retained earnings, debt financing, and new equity financing. Therefore, any decision that affects any one of these variables must necessarily affect at least one of the others. A great deal of empirical work has been done on the components of the capital budget, but very little has been done on the complete capital budgeting decision. A theoretical model is developed to explain the decision-making process of corporations. The assumption is made that the primary objective of corporate planners is to maximize the price of a share of common stock. A series of present value models are then developed to explain the valuation of that stock. From this the optimal capital budget for the corporation is derived. In the final step a complete partial adjustment model is proposed as a more realistic description of actual corporate decision-making. This model takes the form

Investment Planning under Variable Price Change

The effects of inflation on equity claims and profits have attracted the attention of numerous writers. Earlier articles such as those by Kessel and Alchian [4] and DeAlessi [1] considered the relation between monetary assets and fixed-dollar obligations. Given that product prices change at the same rate as the prices of goods and services acquired, the query posed by Nichols [8] and Motley [7] was whether the change in the real value of tax claims greatly surpassed that of the real value of fixed-income claims. Other recent studies have looked into the inflation-hedge characteristics of common stocks [2 and 9] and have pointed to a potential bias introduced into capital-budgeting decisions by price-level changes [11]. This study confirms the erratic behavior of stock prices and corporate earnings as the price level changes, describes an investment-decision model that allows for both price-change expectations and interaction between stock prices and near-term earnings, and applies the price-change model to selected company environments. Preliminary analyses of the sensitivity of common stock prices, profits, and wholesale price and wage indexes to changes in the Consumer Price Index suggest that management either has failed to incorporate price-change expectations adequately into its decision fabric or has frequently misassessed actual rates of price change. The investrient-decision model-as set forth in this article-extends previous work in this area and merits serious consideration for application by corporate planners. Specifically, it rectifies deficiencies in other capitalbudgeting models by allowing for (1) differential rates of change in prices and costs and (2) management's subjective beliefs as to the rate of inflation. Despite its emphasis on near-term earnings, the model converges on the classical net-present-value decision rule at the limit.

A simulation model for the rent-or-buy decision

The decision to rent or buy a home is probably the most important in family finance. Yet the analysis of this problem in the literature has been superfi cial and subject to many criticisms. This paper will develop a complete simulation model to investigate this decision and to look at many related questions such as the type of loan best suited to the family's financial policies, the price range that a given family can afford, and the type of other investments consistent with this decision. The model simulates the family income, expenses, and investment portfolio on a monthly basis over the planning period. The results are compared to a deterministic analysis based on a capital budgeting model of the family. Finally, a case study based on data obtained from a real family will be present ed. Further use of the simulation model to study many other capital budgeting problems associated with family finance will also be discussed.

Financial planning and control of industrial research and development

The author describes a computer model of the research process which makes it possible to distinguish some of the essential issues which need to be faced in financial planning and control of research and development. By exploring a variety of alternatives open to the firm, it is possible to examine the expected financial consequences etc. In summary, a computer model of the research process has been described which lays bare some of the essential elements related to financial analysis and control. When combined with a more general capital budgeting model of the firm, an administrator can select an optimal set of areas, plans for researching these areas and criteria for evaluating the proposals which have been located.

A Myopic Capital Budgeting Model

The classic 1955 paper of Lorie and Savage has stimulated the development of mathematical programming approaches to the analysis of capital budgeting problems. A problem that they considered has been succinctly stated as: given the net present value of a set of independent investment alternatives, and given the required outlays for the projects in each of two time periods, find the subset of projects which maximizes the total net present value of the accepted ones while simultaneously satisfying a constraint on the outlays in each of the two periods.

A Simulation Model of Capital Budgeting Under Uncertainty

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.

A Portfolio Model of Capital Budgeting Under Risk

A Portfolio Model of Capital Budgeting Under Risk

A Model of Capital Budgeting Under Risk

A Model of Capital Budgeting Under Risk

Advertising theory and the capital budgeting model

Advertising theory and the capital budgeting model

The Rate of Interest and the Marginal Product of Capital

Previous articleNext article No AccessThe Rate of Interest and the Marginal Product of CapitalLloyd A. MetzlerLloyd A. Metzler Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 58, Number 4Aug., 1950 Article DOIhttps://doi.org/10.1086/256961 Views: 32Total views on this site Citations: 8Citations are reported from Crossref Copyright 1950 The University of Chicago PressPDF download Crossref reports the following articles citing this article:Carlo Milana Refuting Samuelson’s capitulation on the re-switching of techniques in the Cambridge capital controversy, The Review of Austrian Economics 46 (Aug 2022).https://doi.org/10.1007/s11138-022-00591-yRobert E. Kohn A capital budgeting model of the supply and demand for loanable funds, Journal of Macroeconomics 12, no.33 (Jun 1990): 427–436.https://doi.org/10.1016/0164-0704(90)90006-VJ. E. Woods Notes on capital theory: a comment on ‘the economic basis of interest rates’, Journal of the Institute of Actuaries 116, no.11 (Apr 2012): 109–126.https://doi.org/10.1017/S0020268100036477Donald J. Harris Profits, Productivity, and Thrift: The Neoclassical Theory of Capital and Distribution Revisited, Journal of Post Keynesian Economics 3, no.33 (Nov 2015): 359–382.https://doi.org/10.1080/01603477.1981.11489229Bo Sandelin Wicksell's Missing Equation, the Production Function, and the Wicksell Effect, History of Political Economy 12, no.11 (Mar 1980): 29–40.https://doi.org/10.1215/00182702-12-1-29 Ronald Findlay An "Austrian" Model of International Trade and Interest Rate Equalization, Journal of Political Economy 86, no.66 (Oct 2015): 989–1007.https://doi.org/10.1086/260725Bo Sandelin The Wicksell Effect, Dewey, and Others: A Note, History of Political Economy 7, no.11 (Mar 1975): 123–131.https://doi.org/10.1215/00182702-7-1-123C. E. Ferguson, Donald L. Hooks The Wicksell Effects in Wicksell and in Modern Capital Theory, History of Political Economy 3, no.22 (Jun 1971): 353–372.https://doi.org/10.1215/00182702-3-2-353