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DETERMINING THE APPROPRIATE DISCOUNT RATES IN PURE CAPITAL RATIONING
Author(s) -
Bradley Stephen P.,
Frank Ronald S.,
Frey Sherwood C.
Publication year - 1978
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1978.tb00728.x
Subject(s) - rationing , shadow price , economics , cash flow , earnings , microeconomics , capital (architecture) , maximization , value (mathematics) , discounted cash flow , time horizon , control (management) , discounting , capital budgeting , computer science , finance , mathematics , mathematical optimization , health care , management , archaeology , machine learning , project appraisal , history , economic growth
This paper proposes an interpretation of the pure capital rationing problem as it is faced by many managers in decentralized firms in which budgets serve as the principal means of control. It is argued that the appropriate objective for situations such as these is the maximization of either undiscounted earnings over the planning horizon or total value of the investments at the horizon. When either objective function is used in conjunction with the frequently encountered linear programming models for the capital rationing problem, shadow prices result which give rise to discount rates that will reproduce the optimal solution using discounted cash flow as a criterion. These results are then used as a means for clarifying several confusing and misleading statements that have appeared in the literature.