CAPITAL BUDGETING UNDER UNCERTAINTY: AN OPERATIONAL MANAGEMENT APPROACH

For many firms, especially those with a high degree of operating or financial leverage, standard capital budgeting techniques do not allow for the incorporation of enough important economic or firm specific information. Nor do most techniques allow for the conduct of sensitivity analysis as it pertains to the capital budgeting decision. This thesis presents a capital budgeting model, a simulation model, which ties anticipated cash flows to standard economic factors and derives a distribution of net present values for each project under consideration. Stochastic dominance is then utilized to provide the decision criterion to choose from among these distributions of net present values. Developed, also, is an application of this model to aircraft procurement decisions in the commercial airline industry. Economic variable sensitivity analysis is performed within several of the project comparisons utilized. Further applications of this model are discussed as logical extensions of the work presented here. Among these extensions is the development of hedging strategies, to include the use of options and futures, to reduce project risk. Use of this model within a decisions support framework is cited as its most likely future means of implementation