Project selection and timing integrating project deferral, cash flow transferals, financing and investment functions

Abstract

The success of a firm depends on the overall performance of all projects undertaken, whether they are production, sales, maintenance, or other types of projects. Correctly choosing promising projects becomes one of the most significant prerequisites for the success of the firm. The"correct" decision, in this research, is identified as the selection of the right projects at the right time. While there are various restrictions that limit the selection decision, this study focuses on situations in which the funds available to the candidate projects are limited. Unlike typical project selection problems, which assume that the disposable capital all comes from the specified budget, this research considers four additional methods to increase the funds available for the projects. They are project deferral, cash flow transferals, financing, and investment functions. The purpose is to increase the firm's wealth by selecting worthy projects which would otherwise be rejected. To make the right selection under this new situation, a modified version of Weingartner' s 0-1 integer programming model is developed. By introducing artificial variables, the modified model can be maintained in a linear programming (LP) form (mixed integer). The advantage of the formulation is that, the relatively convenient LP software package can be used to manipulate the tedious calculations and then derive the optimal answer. No new solution techniques are necessary. The revised model is developed under an imperfect capital market condition in which an n-step function is used to describe the dependency between the cost of capital and capital supplied. The workings of the revised model are illustrated by numerical examples. Future research topics, including the uncertainty consideration, are recommended at the end of this thesis.