A microcomputer-based budget allocation and planning algorithm for interdependent projects

Abstract

A budget allocation and planning algorithm was developed for the economic evaluation of interdependent projects. Projects may be characterized by discrete point estimates or by continuous functions. The unique approach of this algorithm is that, if continuous functions are used, the analyst may specify a functional relationship between costs and returns. Budget planning techniques were incorporated into the algorithm to aid the decision maker in planning for future budgetary needs and in influencing the budget determination process. The algorithm utilizes a future worth of net return criterion in conducting the analyses. All projects under consideration need not have the same life; unequal-lived projects may be considered. The algorithm was coded in BASIC on an IBM Personal Computer. Two versions of the algorithm were developed; one which utilizes discrete point estimates to characterize projects, and one which utilizes continuous functions. The algorithm identifies the optimal combination of projects, given a budget profile and various project interdependencies. After the optimal portfolio of projects is identified, four sensitivity analyses may be run to analyze the effect of any uncertainty in the decision environment. An example is provided to illustrate the capabilities and limitations of the algorithm.