A multistage stochastic programming approach for capital budgeting problems under uncertainty

A multistage stochastic programming approach for capital budgeting problems under uncertainty

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Article ID: iaor201352
Volume: 24
Issue: 1
Start Page Number: 89
End Page Number: 110
Publication Date: Jan 2013
Journal: IMA Journal of Management Mathematics
Authors: , , , , ,
Keywords: programming: branch and bound, risk, decision: applications
Abstract:

This paper addresses the capital budgeting problem under uncertainty. In particular, we propose a multistage stochastic programming model aimed at selecting and managing a project portfolio. The dynamic uncertain evolution of each project value is modelled by a scenario tree over the planning horizon. The model allows the decision maker to revise decisions by decommitting from a given project if it shows a negative performance. Risk is explicitly assessed by defining a mean‐risk objective function, where the conditional value at risk is used. A customized branch‐and‐bound method is also introduced for solving the proposed model. Extensive computational experiments have been carried out to validate the model effectiveness, also in comparison with other possible benchmark policies. The numerical results collected by solving randomly generated instances with the proposed branch‐and‐bound approach seems to be encouraging.

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