H. Meier et al., Capital budgeting under uncertainty - An integrated approach using contingent claims analysis and integer programming, OPERAT RES, 49(2), 2001, pp. 196-206
Recently the application of contingent claims analysis and dynamic programm
ing to project evaluation has attracted a let of attention. These technique
s are required, for example! if the value of a project develops stochastica
lly over time and the decision to invest into this project can be postponed
. Yet. so far there are no considerations regarding how this perception of
projects reflects on a capital budgeting situation. We propose two approach
es that integrate these methods with traditional capital budgeting, models.
A simple capital budgeting model can be formulated as the problem of findi
ng time portfolio of options that has maximal value and fulfils the capitol
expenditure constraint. However, this model has some shortcomings regardin
g its applicability in traditional budgeting situations. Therefore, we defi
ne an alternative optimisation model that uses scenarios to depict a set of
possible future states. The optimal portfolio is then equivalent to a dyna
mic investment strategy that determines a number of state-dependent optimal
portfolios.