The CapBudPsL.lng Model

Project Selection Model in LINGO

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Many large firms have a yearly capital budgeting process for deciding which projects to initiate each year. This model is perhaps the simplest one to start with in doing this process. Each project is characterized by just two numbers: a) the initial cost, and b) the net present value(NPV) of both the initial cost and all future cash flows associated with the project. For various reasons, e.g., borrowing agreements with its banks, the firm has a constraint on how much can be invested this year. An additional detail in this model is that the projects are partitioned into a number of sectors or departments. There is an additional budget constraint for each sector. The purpose of this constraint might be to enforce diversification in its projects so that "not all the eggs are in one basket".

Keywords:

Capital Budgeting | Project Selection | Portfolio Selection |