Use of Linear Programming in Capital Budgeting with Multiple Goals

A Multiple Objective Approach to Capital Budgeting

“…A second way of including multiple objectives within LP models has been advocated by Candler [16] and [17] and more recently by Chateau [24].' This approach attempts to aggregate the multiple objective functions into a single function defining a complete preference order.…”

“…A nonlinear MCP formulation of the problem is subsequently discussed. The example given by Candler [16] concerns an objective of minimising pollution within the context of two alternative investments: ( 1 ) a large sewage installation that would ' 'The Chateau approach is discussed in greater detail subsequently. This paper disagrees with the central thesis of Chateau's paper that MCP is a preferable technique to Goal Programming.…”

“…A more ordinal approach has been postulated by Dyer [29] in which the programme poses questions to a manager and his responses thereby reveal his trade-offs without requiring that he be aware of their meaning or significance. Candler [16] proposed an iterative approach using both the decision-maker and the LP analysis as 'black boxes' with the output of one used as input to the other. Candler's method is given below:…”

“…Having appraised the results of the model, the priority structure may be altered in favour of some of the longer run goal^.^' This technique has a long precedent. Roy [49] and Candler [16] point out that the relationship between two conflicting objectives may either be difficult to ascertain or fuzzy. Roy [49] isolates three types of deterministic situations with regard to the definition of the preference function.32…”

“…In the pollution example cited earlier, the air-polluting project was given a score of -100 on the pollution scale. If the decision-makers feel that, ceteris paribus, they would be willing to forego this project if it does not add at least $20,000 to final cash, the implication is that the initial weight for the pollution goal might well be set at $200 of final cash per unit ( [16] page 427).…”