The desired end result of the capital budgeting process is the selection of an optimal portfolio of investments from a set of alternative investment proposals. An optimal portfolio of investments is defined as the set of investments that makes the greatest possible contribution to the achievement of the organization's goals, given the organization's constraints. The constraints faced by a corporation in the capital budgeting process can include limited supplies of capital or other resources as well as dependencies between investment proposals. A dependency occurs if two projects are mutually exclusive, acceptance of one requires rejection of the other, or if one project can be accepted only if another is accepted. Assuming that the organizational goals and constraints can be formulated as linear functions, the optimal set of capital investments can be found using linear programming (LP).
CAPITAL BUDGETING UNDER CAPITAL RATIONING
Capital rationingis a constrained capital budgeting...
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