Capitol Budgeting

Capitol Budgeting

Class notes

Capitol Budgeting assumptions

  1. all assets are indivisible
  2. only have restrictions on period zero
  3. only one MARR
  4. algorithm only works for a small number of choices

Process steps

  1. Find all asset cominations
  2. Eliminate combinations that aren't feasible
  3. Find Present Worth of remaining combinations
  4. Pick the combination with the largest Present Worth

example: with Retained Earnings of $20

A B C D E
Period 0 2 5 10 15 20
Present Worth 6 8 12 14 18

Step 1: skipping to step 2.
Step 2: feasible combinations
AB
AC
AD
BC
BD
ABC

Step 3: find present worth of combinations
AB = 6+8 = 14
AC = 6+12 = 18
AD = 6+14 = 20
BC = 8+12 = 20
BD = 8+14 = 22
ABC = 6+8+12 = 26

Step 4: pick largest Present Worth
ABC = 26
with initial cost of $17 leaving $3 of retained earnings

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