The Long Term Effectiveness of Expected Net Present Value Maximization in an Environment of Incomplete and Uncertain Information

Oakford, R. V.; Salazar, Arturo; Diguilio, Hugo A.

doi:10.1080/05695558108974560

Cited by 9 publications

(4 citation statements)

References 9 publications

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“…By definition, the elements of the payoff vector of a steady state AnMod firm grow at rate gF from one decision to the next; consequently, evaluation of the steady state growth rate gF of an AnMod firm (with or without long term debt) is relatively simple because it is equal to the yield of the net cash flow series (comprising both investments and new debt) for the current decision. A formula for evaluating the (current) payoff vector for a steady state AnMod firm (Oakford et al, 1979) was used to evaluate initial payoff vectors for the more realistic simulation model described later.…”

Section: Figure 5 Long Term Debt Opportunitymentioning

confidence: 97%

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The Long Term Effectiveness of „exact” and Approximate Capital Rationing Procedures Under Uncertainty and Incomplete Information

Oakford

Salazar

1981

Business Fin & Account

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IntroductionThe problem of capital rationing has been treated extensively, with the focus directed primarily on two of its aspects: (a) discussion of the merits of specific measures of worth such as present worth, internal rate of return, benefitlcost ratio, etc. (Bernhard, 1971) (Grant et al., 1976) (Solomon, 1956 and (b) the development of selection procedures (Baumol and Quandt, 1965) (Bernhard, 1969) (Lorie and Savage, 1955) (Weingartner, 1963) that would maximize one such measure of worth if the decision maker had complete information about future investment opportunities and if his estimates of expected future cash flows were accurate. Much of the literature is devoted to mathematical programming procedures that optimize a single decision and, thereby, implicitly assume that the decision maker has complete information and that all projects will be converted to cash by the horizon time. Hughes and Lewellen (1974) present well reasoned arguments to support their conjecture "that mathematical programming solutions to capital rationing problems confer benefits insufficient to justify their cost and complexity in the great majority of practical applications". This article presents empirical evidence that strongly supports their conjecture.The principal advantage of such capital rationing procedures is their amenability to mathematical analysis. Their principal weakness is a lack of realism, because their formulations usually imply that cash flows are certain and treat each capital rationing decision as though it were independent of all other capital rationing decisions, thereby implicitly assuming that the decision maker has complete and certain information about investment opportunities. Such treatment ignores the fact that the current capital rationing decision is commonly one in a long sequence that started some time ago and is expected to continue indefinitely, unless halted by ruin, and also fails to recognize that the decision must be based on incomplete information and uncertain cash flows. By incomplete information we mean that the decision maker (hereafter referred to as DM) does not have, at the time of the decision, cash flow estimates for all investment opportunities that will appear between now and the horizon time for the decision, nevertheless, the current decision will affect the budgets he will have when those opportunities become known. The situation occurs when the lives of investment opportunities exceed the time between decisions.

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Section: Figure 5 Long Term Debt Opportunitymentioning

confidence: 97%

“…A formula for evaluating the (current) payoff vector for a steady state AnMod firm (Oakford et al, 1979) was used to evaluate initial payoff vectors for the more realistic simulation model described later.…”

Section: Figure 5 Long Term Debt Opportunitymentioning

confidence: 99%

The Long Term Effectiveness of „exact” and Approximate Capital Rationing Procedures Under Uncertainty and Incomplete Information

Oakford

Salazar

1981

Business Fin & Account

Self Cite

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“…Traditionally, cash°ows are treated as either deterministic or stochastic. However, as shown in simulation studies [32], uncertain information in estimating these cash°ows can limit the value of the analysis. Errors in deterministic cash°ow estimations can skew the results of the analysis.…”

Section: Fuzzy Concepts In Cash Flow Analysismentioning

confidence: 99%

“…In previous models, aggregate cash°ows were treated as either deterministic or stochastic variables, but errors in these can lead to skewed analysis [32]. Subjective probability distributions generally cannot be veri¯ed, while the required historical information for generating frequency-based probability distributions is not generally available.…”

Section: Some Sources Of Uncertainty In Replacement Analysismentioning

confidence: 99%

On replacement models via a fuzzy set theoretic framework

Esogbue

Hearnes

1998

IEEE Trans. Syst., Man, Cybern. C

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Abstract| Uncertainty is present in virtually all replacement decisions due to unknown future events, such as revenue streams, maintenance costs, and in°ation. Fuzzy sets provide a mathematical framework for explicitly incorporating imprecision into the decision making model, especially when the system involves human subjectivity. This paper illustrates the use of fuzzy sets and possibility theory to explicitly model uncertainty in replacement decisions via fuzzy variables and fuzzy numbers. In particular, a fuzzy set approach to economic life of an asset calculation as well as a¯-nite horizon single asset replacement problem with multiple challengers is discussed. Because the use of triangular fuzzy numbers provides a compromise between computational efciency and realistic modeling of the uncertainty, this discussion emphasizes fuzzy numbers. The algorithms used to determine the optimal replacement policy incorporate fuzzy arithmetic, dynamic programming with fuzzy rewards, the vertex method, and various ranking methods for fuzzy numbers. A brief history of replacement analysis, current conventional techniques, the basic concepts of fuzzy sets and possibility theory, and the advantages of the fuzzy generalization are also discussed.

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Capital Budgeting: A Survey

Lister¹

1984

Management Accounting, Organizational Theory and Capital Budgeting

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The Long Term Effectiveness of Expected Net Present Value Maximization in an Environment of Incomplete and Uncertain Information

Cited by 9 publications

References 9 publications

The Long Term Effectiveness of „exact” and Approximate Capital Rationing Procedures Under Uncertainty and Incomplete Information

The Long Term Effectiveness of „exact” and Approximate Capital Rationing Procedures Under Uncertainty and Incomplete Information

On replacement models via a fuzzy set theoretic framework

Capital Budgeting: A Survey

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