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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
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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.

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

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References

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