R. V. Oakford

A Dynamic Replacement Economy Decision Model

Abstract A generalization of Wagners dynamic programming model for the replacement economy decision problem is presented. The model, illustrated by numerical examples, classifies relevant cash flows into three components: capital transfers, operating disbursements, and operating revenues. Conceptually, this model could be extended easily to an arbitrary number of component cash flows. Multiple alternative challengers to a current defender are considered, and each component cash flow of each challenger can vary independently according to the time of acquisition; thus differential inflation and prospective technological changes could be dealt with easily. A PASCAL implementation of the model, included as an appendix, was used to identify prospectively optimal sequences of assets in three numerical examples.

A graph formulation of a school scheduling algorithm

The problem classically titled “The Examination Schedule Problem” takes various forms in the literature. Most of these formulations can be presented in the terminology of classical Network Theory. One such formulation is: Given a nondirected network, partition its nodes into a minimal number of subsets such that no two members of the same subset are connected by an arc. An obvious lower limit to this number is the size of the largest strongly connected subgraph. Kirchgassner proved that an upper limit is this size plus one. One logical extension of the previous work is the introduction of variable length examinations where W(I) is the number of periods for exam I. The object of this paper is to generalize the definition of largest strongly connected subgraph to include the weighting of nodes, to present an approximate algorithm which usually finds the largest strongly connected subgraph, and to discuss the application of this algorithm to the solution of school scheduling and exam scheduling problems.

The Maximum Prospective Value Criterion

Abstract In this paper the authors analyze the logic of the capital budgeting decision in two different settings. First it is assumed that the decision-maker has complete information about both his current and future investment opportunities in which case the decision problem reduces basically to a computing problem. Second it is assumed that the decision maker has complete information about his current investment opportunities and a knowledge of his expectations about future investment opportunities. The authors analyze the logic underlying the selection of the capital growth (discount) rate that should be used in determining whether a marginal increment of investment should be accepted or rejected. If the marginal increment were rejected, the unused cash would typically be invested temporarily in a highly liquid investment at a relatively low interest rate with the prospect that a better than marginal investment would absorb the funds at the next decision time. The analysis led to the formulation of a c...

The Long Term Effectiveness of Expected Net Present Value Maximization in an Environment of Incomplete and Uncertain Information

Abstract Most mathematical programming procedures used for optimizing capital rationing decisions consider each decision in isolation. They implicitly require that the decision maker shall know, at the time of decision, all the investment opportunities that will appear between that time and the horizon time of the decision, and further, that all assets will be converted to cash at the horizon time. The research described in this article used a simulation methodology for studying the long term effectiveness of expected net present value maximization in an environment of incomplete and uncertain information. Some tentative conclusions are drawn from its use in long sequences of decisions in hypothetical firms: consistent use of a Rank:on-Net-Present-Value selection procedure will tend to maximize the expected capital growth rate of the firm if the discount rate is properly selected and expected cash flows are accurately estimated; however, failure to meet either of these conditions can have a seriously adve...

A Decision Procedure for Capital Rationing Investment and Borrowing Decisions

This paper presents a decision procedure to aid in making capital rationing investment and borrowing decisions. Weingartners Basic Horizon Model and Oakford and huesens Maximum Prospective Value criterion are both extended to explicitly include long-term borrowing decisions. Information derived from interviews with financial executives on the subject of business attitudes toward borrowing is used to develop the conceptual logic of the decision procedure, which is presented in terms of a mathematical programming formulation.

ANMOD AND DECSIM:TWO MODELS OF SEQUENCES OF CAPITAL RATIONING DECISIONS AND THEIR USE IN EVALUATING CAPITAL BUDGETING POLICIES

Abstract A relatively simple analytic model, called AnMod, and a sophisticated Monte Carlo simulation model, called DecSim, of sequences of capital rationing investment decisions are described briefly. AnMod is an effective predictor of the expected performance of various capital rationing selection procedures and of the potential effects of capital budgeting policies considered by entities in realistic capital budgeting decision environments. Numerical examples of its use are presented. The major results of over 20 years of research using DecSim, its two predecessors and related simulation models is summarized. That research includes investigations of the potential affect on an entitys equity capital growth rate of: incomplete information, uncertainty, risk, choice of a cutoff rate, debt policy, and several investment decision procedures. The paper concludes with a summary of the practical insights gained from the use of AnMod and DecSim and some recommendations for future research.

Factors That Affect the Growth Rate of Equity Capital

Abstract Six factors that affect either the transient or the long-term growth rate of equity capital are identified. The use of the net present value method of financial accounting to compute the equity value of hypothetical firms is described. Simulation of sequences of capital budgeting decisions in hypothetical firms was used to illustrate the effects of the six factors on the growth rate of equity capital. The upper limit of a firms steady-state capital growth rate was affected by (1) the maximum yield attainable from its long-term investments, (2) its debt policy, (3) its budget allocation policy, and (4) the (average) life of its long-term investments. Unless the selection procedure was random, the transient values of a firms annual growth rate of equity were affected appreciably by (1) the growth rate of its long-term investment opportunities, (2) its debt policies, and (3) its past decisions. Random variation in the growth rate of investment opportunities had little affect on the average growth ...