Linear Programming in Capital Budgeting

Capital budgeting is big topic of financial management. In capital budgeting decision, we not only evaluate different capital budgeting techniques but we also evaluate different alternatives of our projects on the basis of linear programming. Linear programming is technique of financial mathematics. With linear programming, we succeed to choose best quantity of two projects. Actually, linear programming has developed for taking  production quantity decisions in which manufacturer selects the optimum quantity of two products under different conditions. But, finance experts have learned the simplex and graphic method of linear programming and tried to use in capital budgeting decisions. They have succeeded in it. Now, it has been included in capital budgeting decisions chapter of CS Accounting Books.

So, today, we will learn linear programming with Simplex Method and Graphic Method with my following videos.

1st Simplex Method of Linear Programming 

Suppose, you have two project in which you have to invest your money. You estimate the profit rate of each project. It is $ 6 in first project and $ 7 in second project per unit. You have to select the quantity of investment in our two projects. Suppose, you have to buy 1,00,000 debentures or any other total quantity. First project may be investment in A company's debentures and project B may be B company's debentures. Either you can invest our money in  70,000 debentures  in A company and  30000 debentures  in B company. But is it the best way to maximize our profit or not? So, choosing best option, we will make simplex table 1, 2, 3 and more.  We also do not ignore different condition. Condition may be of your limited capital or limited time or any other condition.

First of all we convert our problem in mathematical equation.

No. of Debentures in A company = X1

No. of Debentures in B company = X2

Maximize = $ 6 X1 + $ 7 X2

Our conditions may be

2 X1 + 3X2 < / = 12

2X1 + X2 < / = 8

We have solved this problem with part 1 to part 10 videos and showed here in playlist form. Watch it and learn linear programming simplex method step by step.

2nd Graphic Method of Linear Programming 

In this method, we just draw the conditions of linear programming problem on the graph paper and then we use the corner points of feasible area for getting best options of quantities  of two product or project. I taught graphic method of linear programming and you can learn  at this video in you tube.

Related : Sensitive Analysis in Finance


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Accounting Education: Linear Programming in Capital Budgeting
Linear Programming in Capital Budgeting
Accounting Education
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