Capital Budgeting Using a Linear Programming Model

A linear programming model designed to determine the most economical arrangement of finance suitable for a contractor is described. The model requires data in the form of project cash flows and information on loan capital. These are incorporated into a linear programme which determines the least costs of borrowings. Results from the model can be used by management to decide on the best combination of capital sources, to arrange the best times to start and finish projects and to select projects to minimise the total net present cost of capital.