Computation Section

Capital Budgeting

Excel Page

Capital Budgeting

An organization has a number of proposed projects from which it must select some subset. Each project is described by the cash flow it receives from or returns to the organization during some time period. The capital budgeting question is which projects should be pursued by the organization. A selection of projects is called a portfolio. The problem addressed by the Capital Budgeting add-in is to select the optimum portfolio given a budget for the total investment in the projects of the portfolio. Several varieties of the model are available as described by the accompanying pages.

The Capital Budgeting add-in and the other add-ins mentioned here can be downloaded from the Excel Download page. All options in this add-in construct mathematical programming models using the Math Programming add-in, so that add-in must be installed. Most of the models are solved with the Excel Solver add-in. Be sure that add-in is installed. Open and close the Solver dialog before attempting to create and solve a model. Linear models may be solved with the Jensen LP/IP Solver add-in. These add-ins have been modified to work efficiently with this Capital Budgeting add-in, so be sure to download the latest versions. Before using the add-ins be sure you know how to install add-ins for Excel.

The Demo Workbooks have Excel models for the examples considered in this unit.


When installed, the add-in places commands on under the OM/IE item on the main Excel menu. The various commands on the menu are described in this unit.

Create Model
The Create Model command creates and solves a capital budgeting problem. The model is either a nonlinear or linear program depending on the problem solved. The problem is to select from a set of alternative projects a portfolio of projects that provides the greatest economic return (Net Present Worth) while not exceeding a budget on the amount of the total initial capital investment. The model may also include risk measured by the variance of the NPW of the portfolio.

The Multiperiod command accepts data similar to the capital budgeting problem and creates a model that describes the cash flow in each period explicitly. In this way, projects with a non-uniform cash flow can be easily represented. Each period has a specified cash flow requirement and a feasible solution must generate sufficient cash to meet these requirements.

The Actions command presents a dialog that allows a model to be solved to find the optimum portfolio, compute the rate of return for a specified portfolio, generate an efficient frontier of optimum portfolios and reveal or hide the math programming model.


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Operations Management / Industrial Engineering
by Paul A. Jensen
Copyright 2004 - All rights reserved

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