Capital Budgeting Using SOLVER in Excel - A Capital Rationing Problem (Integer Programming)
What happens if you have a list of proposals but the 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐛𝐮𝐝𝐠𝐞𝐭 𝐢𝐬 𝐥𝐢𝐦𝐢𝐭𝐞𝐝, so you are trying to find the optimal combination to 𝐦𝐚𝐱𝐢𝐦𝐢𝐳𝐞 𝐭𝐡𝐞 𝐭𝐨𝐭𝐚𝐥 𝐧𝐞𝐭 𝐩𝐫𝐞𝐬𝐞𝐧𝐭 𝐯𝐚𝐥𝐮𝐞 (𝐍𝐏𝐕) of the company?
That is what we call a 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐫𝐚𝐭𝐢𝐨𝐧𝐢𝐧𝐠 problem, which is part of the capital budgeting process.
In this video, I will use Excel to compute the projects' net present value (NPV) and use 𝐒𝐨𝐥𝐯𝐞𝐫 to select the projects that will maximize NPV given the capital constraint.
#financialmodeling #capitalbudgeting #capitalrationing #solver #excel #npv #msexcel #investmentappraisal #projectevaluation
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐁𝐮𝐝𝐠𝐞𝐭𝐢𝐧𝐠 is the process that companies use for decision making on capital projects (with a life of a year or more).
𝘾𝙖𝙥𝙞𝙩𝙖𝙡 𝘽𝙪𝙙𝙜𝙚𝙩𝙞𝙣𝙜 𝙋𝙧𝙤𝙘𝙚𝙨𝙨
1) 𝗚𝗲𝗻𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗜𝗱𝗲𝗮𝘀
2) 𝗔𝗻𝗮𝗹𝘆𝘇𝗶𝗻𝗴 𝗜𝗻𝗱𝗶𝘃𝗶𝗱𝘂𝗮𝗹 𝗣𝗿𝗼𝗽𝗼𝘀𝗮𝗹𝘀
3) 𝗣𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝘁𝗵𝗲 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗕𝘂𝗱𝗴𝗲𝘁
4) 𝗠𝗼𝗻𝗶𝘁𝗼𝗿𝗶𝗻𝗴 𝗮𝗻𝗱 𝗣𝗼𝘀𝘁-𝗮𝘂𝗱𝗶𝘁𝗶𝗻𝗴
In this video, we will use Excel to compute the projects' net present value (NPV) and use Solver to select the projects that will maximize NPV given the capital constraint.