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A robust goal programming model for the capital

budgeting problem

Fatemeh Ghasemi Bojd & Hamidreza Koosha

To cite this article: Fatemeh Ghasemi Bojd & Hamidreza Koosha (2018) A robust goal
programming model for the capital budgeting problem, Journal of the Operational Research
Society, 69:7, 1105-1113, DOI: 10.1080/01605682.2017.1389673

To link to this article: https://doi.org/10.1080/01605682.2017.1389673

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Journal of the Operational Research Society, 2018
VOL. 69, NO. 7, 1105–1113
https://doi.org/10.1080/01605682.2017.1389673

A robust goal programming model for the capital budgeting problem

Fatemeh Ghasemi Bojda and Hamidreza Kooshab 
a
Department of Industrial Engineering, Sadjad University of Technology, Mashhad, Iran; bFaculty of Engineering, Department of Industrial
Engineering, Ferdowsi University of Mashhad, Mashhad, Iran

ABSTRACT ARTICLE HISTORY

Considering financial limitations, organizations should choose among various investment Received 25 February 2016
opportunities. Wrong decision making for selecting projects may lead to waste of resources as Accepted 15 August 2017
well as opportunity cost and negative long term consequences. Thus, capital budgeting problem
KEYWORDS
can be solved to make proper decisions. Some of the main parameters of these problems, e.g.,
Capital budgeting; goal
cash flows, are not deterministic. In addition, budget constraints of the capital budgeting programming; robust
problem are soft, i.e., they can be violated. In this paper, we propose a new model for the capital optimisation; liquidity goal
budgeting problem which can deal with uncertainty and benefits from soft constraints so that it
can still provide a feasible solution. Goal programming is used to increase model flexibility and
robust optimisation is applied to deal with uncertainty. The model is examined with different
numerical illustrations. Finally, results are analysed and advantages of the new model are
discussed. Results are promising and the approach is highly tractable and easy to implement.

1. Introduction However, this method has a number of disadvantages.

For example, the models rapidly enlarge as a function
Capital budgeting is about deciding where to invest the
of the number of time periods and projects. In addition,
capital and resources of an organisation. It is a vital sec-
stochastic models do not handle risk aversion in a direct
tion in every organisation (Geravis, 2010). Budgeting is
fashion (Mulvey et al., 1995). They also need to define a
a critical issue that top management, as well as middle
probability distribution for cash flows; in practice, it is
management, is always engaged with. In the real world,
hard to estimate or specify a probability distribution for
a wide range of investment cases benefit from capital
such usually imprecise information (Kachani & Langella,
budgeting (Kachani & Langella, 2005). Any wrong
2005).
decision could result in poor or even disastrous conse-
A robust optimisation approach can effectively deal
quences, eg, probable costs of non-economical projects
with data uncertainty. By defining a symmetric change
or costs of losing better projects (Martino, 1995).
interval for uncertain parameters, such a solution can
Deterministic capital budgeting models implicitly
remain feasible and close to optimal even when the
rely on the assumption that accurate information is
parameters change (Soyster, 1973).
obtainable. Decision-makers are responsible for gath-
Furthermore, The constraints of the capital budgeting
ering this data, usually by means of prediction methods.
problem are flexible, and thus, taking them strictly causes
Such deterministic models simply ignore uncertainty
the solution space to be deficiently limited. If a capital
(Kachani & Langella, 2005). Nevertheless, predictions
budgeting problem is modelled with goal programming,
may not come true and decisions may become undesir-
the solution space will expand and planning can encom-
able. Thus, it is necessary to have models that consider
pass reaching a certain liquidity goal. Combining goal
uncertainty.
programming and robust optimisation for modelling
Sensitivity analysis is a reactive approach to deal-
capital budgeting can extend the classical capital budg-
ing with uncertainty. It just illustrates the sensitivity of
eting model. In this paper, we propose a model for the
a solution to variations in the input data. It does not
capital budgeting problem which is immune to uncer-
suggest any mechanism to control sensitivity (Mulvey,
tainty and has soft constraints so that the solution space
Vanderbei, & Zenios, 1995).
is expanded and it would still be possible to provide a
Stochastic programming has also been developed
feasible solution despite budget constraints.
in order to deal with uncertainty (Dantzig, 1955).

CONTACT  Hamidreza Koosha  koosha@um.ac.ir

© The Operational Research Society 2017
1106   F. GHASEMI BOJD AND H. KOOSHA

The rest of the paper is organised as follows. Section 3.  Goal programming for capital budgeting
2 is devoted to literature review. Then, the basic model is horizon model
introduced and rewritten in the form of goal program-
Consider the circumstances in which budget is limited
ming. Robust optimisation will be reviewd and the goal
in every period and lending and borrowing are permit-
programme model will be introduced as an extension of
ted. The interest rate for borrowing and lending may be
Bertsimas and Sim’s method (Bertsimas & Sim, 2004).
different. i ∊ I is the set of periods and j ∊ J is the set of
Computational results are shown in the next section and
projects. The parameters and variables are defined as
managerial implications are then provided. The paper is
follows:
concluded with the advantages of the proposed model
Parameters:
compared to previous models.
aij: cash flow for project i in period j,
rl: interest rate for lending,
2.  Literature review rb: interest rate for borrowing,
The first research on capital budgeting reported in Mi: available budget at time i,
the mid-50s (Gunther, 1955; Lorie & Savage, 1955). N: planning horizon;
Markowitz and Manne (1957) modelled the capital
Decision variables:
budgeting problem in the form of linear program-
xj: binary variable for choosing projects
ming. Weingartner (1966, 1977), Bernhard (1969),
vi: the money lent from period i to period i + 1
and Luenberger (1998) investigate linear and non-lin-
wi: the money borrowed from period i to period
ear models, as well as the use of discount rates. Lee
i + 1
and Kim (1994) presented a methodology for capital
Di+: positive deviaion from budget at period i
budgeting problem with flexible budgeting. Verbeeten
Di−: negative deviaion from budget at period i
(2006) investigated the relation between specific uncer-
S+: positive deviaion from liquidity goal
tainties and sophisticated capital budgeting practices.
S−: negative deviaion from liquidity goal
Shakhsi-Niaei, Torabi, and Iranmanesh (2011) proposed
By this notation, the following model is proposed
a comprehensive framework for project selection prob-
(Park and Sharp-Bette 1990):
lem under uncertainty and subject to real-world con-
straints. Zhang, Huang, and Tang (2011) discussed the max vN − wN
multinational capital budgeting problem. Chittenden vn ,wn (1)
and Derregia (2015) studied the use of simple capital
s.t. ∑
budgeting techniques to capture the effect of uncer-
tainty and irreversibility on capital budgeting deci-
−
j
a0j xj + v0 − w0 ≤ M0 (2)
sions in practice. Tomasz Wnuk-Pel (2014) explored ∑ ( )
the extent use of capital budgeting methods and also − aij xj − 1 + rl vi−1 + vn + (1 + rb )wi−1
factors determining the method selection. Kuruppu et
j
(3)
− wi ≤ Mi i = 1, 2, … , N
al. (2016) argued that participatory budgeting in the
specific field of less-developed countries can have far
greater effects than simply revitalising local democracy, xj ∈ {0, 1} j = 1, … , J (4)
including providing personal gains and potentially pos-
ing a threat to democracy. Souza and Lunkes (2016) xj , v i , w i ≥ 0 i = 0, … , N (5)
with analysing the use of capital budgeting practices in
The objective function (1) calculates liquidity at the end
large Brazilian companies, concluded that companies
of the planning horizon. Constraint (2) is the budget
adopt especially the Payback Period, the Net Present
constraint for period 0. Constraint (3) is the budget
Value and the Internal Rate of Return in the assessment
constraint for the other periods, including paying back
of capital budgeting, with scenario and sensitivity analy-
the lent and borrowed amounts. Constraints (4) and (5)
ses to examine the investment risk. Table 1 summarises
show the status of the variables. Since fractional projects
studies on capital budgeting according to their applied
are not allowed, xj is a binary variable.
techniques.
Below, the basic model is rewritten as a goal pro-
The model proposed in this paper, is a robust goal
gramming model. Generally, decision-makers expect to
programming model; we rewrite horizon capital budg-
achieve a minimum of liquidity at the end of the plan-
eting model by using goal programming. Then consider-
ning horizon. Therefore, goal A is determined for the
ing cash flows as uncertain parameters, we adapt the goal
final liquidity and the objective function is transformed
programming model to the robust optimisation frame-
to the following:
work. Therefore, we promote the robust model proposed
by kachani and Langella, and extend its capabilities. v N − wN + S + − S − = A (6)
 JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY   1107

Table 1. Studies on capital budgeting and their methods.

Technique
Soft/Hard con-
Research Objective straints Goal Programming Fuzzy Robust Stochastic
Hawkins and Adams (1974) Goal programming applied to capi- Soft ☑
tal budgeting, which incorporates
directly the existence of multiple
conflicting goals
Lawrence and Reeves (1982) A 0-1 goal programming model for Soft ☑
capital budgeting in a property
and liability insurance
Taylor and Keown (1983) An integer goal programming Soft ☑
model for capital allocation of
metropolitan mass transportation
agencies
Mukherjee and Bera (1995) Application of goal programming Soft ☑
in project selection for the Indian
Coal mining industry
Kalu (1999) Capital budgeting under uncertain- Soft ☑
ty: An extended goal program-
ming approach
Kuchta (2000) Presenting Fuzzy equivalents of all ☑
the classical capital budgeting
Kim and Emery (2000) A 0-1 goal programming model for Soft ☑
project selection in Woodward
Governor company
Kachani and Langella (2005) Robust capital budgeting & capital Hard ☑
rationing
Omitaomu and Badiru (2007) Fuzzy present value analysis Hard ☑
Huang (2007) Chance-constrained programming Hard ☑
models for capital budgeting with
NPV as fuzzy parameters
Huang (2008) Optimal project selection with Hard ☑
random fuzzy parameters
Liao and Ho (2010) Investment project valuation based Hard ☑
on a fuzzy binomial approach
Zhang, Huang, and Tang (2011) Optimal multinational capital budg- Hard ☑
eting under uncertainty
Hanafizadeh and Latif (2011) Robust net present value Hard ☑
Tsao (2012) Fuzzy net present values Hard ☑
Karanovic and Gjosevska (2012) Application of fuzzy logic in Hard ☑
determining cost of capital for the
capital budgeting process
Bas (2013) A robust approach to the decision Hard ☑
rules of NPV and IRR

This constraint is added to the model and the other con- xj ∈ {0, 1} ∀j ∈ {1, 2, … , J} (12)
straints are rewritten using slack variables. The net costs
of each period should not surpass the predetermined In the above model, adding slacks has caused budget
budget and at the end of the planning horizon, the final constraints to be less strict and more flexible. The objec-
liquidity should be equal or greater than the desired goal. tive function is to minimise unfavourable deviations.
The goal programming model is as follows:
∑N 4.  Robust optimisation
Min S+ +
i=0
Di− (7)
Whenever researchers in the field of operations research
s.t. want to build a model close to the real world, they are
faced with the problem of noisy, incomplete, or errone-
v N − wN + S + − S − = A (8) ous data (Mulvey et al., 1995). The classical mathematical
∑J programming is to model with precisely known input
a0j xj + v0 − w0 + D0+ − D0− = M0 (9) data. This approach does not consider the influence of
j=1
data uncertainties on the quality and feasibility of the
J
∑ solution. It is therefore possible that changing data
aij xj + vi − (1 + rl )vi−1 + (1 + rb )wi−1 values from their nominal amounts, causes violation
j=1 (10) of several constraints, and the optimal solution based
− wi + Di+ − Di− = Mi on the nominal data may no longer be optimal or even
feasible. This observation makes the natural question of
producing solution approaches that are immune to data
vi , wi , S− , S+ , Di+ , Di− ≥ 0 ∀i ∈ {0, 1, … , N} uncertainty; that is called “robust” (Bertsimas & Sim,
(11) 2004). Recently, robust optimisation has become very
1108   F. GHASEMI BOJD AND H. KOOSHA

∑ ∑
popular in the field of operations research. (Albadvi & aij xj + zi Γi + pij + vi − (1 + rl )vi−1
Koosha, 2011) j j∈Ji (16)
Uncertainty was first considered by Soyster (1973), + (1 + rb )wi−1 − wi + Di+ − Di− = Mi ∀i
who proposed a linear model feasible for every piece
of data that belonged to a convex set (Soyster, 1973). zi + pij ≥ â ij yj ∀i, j ∈ Ji (17)
Although his proposed method had a high conservativ-
ity, sensitivity analysis showed poor results compared to −yj ≤ xj ≤ yj ∀j (18)
the basic model. To improve the robust results, Ben-Tal
and Nemirovski proposed a model (2000). According to pij ≥ 0 ∀i, j ∈ Ji (19)
the fact that some uncertain parameters always deviate
from their initial value, Bertsimas and Sim (2004) pre- yj , xj ∈ {0, 1} ∀j (20)
sented a robust model with a new different parameter.
They later proposed another linear model based on their
zi , vi , wi , S− , S+ , Di+ , Di− ≥ 0 ∀i (21)
original one. The advantage of the new model was that
it helped a decision-maker to determine the robustness The proposed model is able to solve a wide range of
and conservativity level by changing this new parame- problems in any scale. The radius of the change interval
ter (Bertsimas & Sim, 2004). Kuchta (2004) proposed â ij can be defined differently for every aij based on the
the goal programming multi-objective linear model of value of cash flow. For this reason, the radius of changes
Bertsimas and Sim’s robust model. is considered as a coefficient of the nominal values of
the cash flows. By defining parameter ν as the coeffi-
5.  Robust goal programming time horizon cient of the radius of changes, the following equation
capital budgeting model is obtained:

Suppose cash flows aij are uncertain. Consider the ith â ij

constraint of the problem. Let Ji be the set of uncertain
coefficients in row i. each cash flow aij, j ∊ Ji, is considered
as a symmetric and bounded random variable ã ij, j ∊ Ji
that takes values according to a symmetric distribution
with a mean equal to the nominal value aij in the interval
[aij − â ij , aij + â ij]. For every i, parameter Γi that is not
necessarily integer and is limited to the interval [0, |Ji|],
is introduced and called protection level. The role of Γi
is keeping a trade-off between robustness of the model
and the level of conservativity of the solution. Actually, it
is not likely that all of aij change together. The purpose of
the model is to protect the solution from every case that
in them at most⌊Γi ⌋parameters are allowed to change. In
other words, in the nature, only a subset of coefficients
is going to change in order to get the solution worse.
Bertsimas and Sim use this nature tend, and in this situa-
tion the robust solution is going to be feasible. Moreover
if more than ⌊Γi ⌋ of coefficients get changed, the robust
solution remains feasible with a good chance (Bertsimas
& Sim, 2004). In this section, the goal programming
model of Section 3 is improved using the robust method
of Bertsimas and Sim:
∑N
Min S+ + Di−
i=0
s.t.
v N − wN + S + − S − = A
∑ ∑
aij xj + z0 Γ0 p0j + v0 − w0 + D0+ − D0− = M0
j
j∈J0
𝜈= ≥ â ij = 𝜈 × aij (22)
aij
According to (22), constraint (18) can be rewritten as:
zi + pij ≥ 𝜈aij yj (23)
By assigning different values to v, the length of the
change interval is determined according to the nominal
value of cash flow.
6.  Numercical illustrations and computional
results
Two sets are used in the model: a set of projects and a
set of planning horizons. The number of variables and
constraints of the basic, goal programming and robust
goal programming models can be obtained according
to these sets. Table 1 shows the dimensions of the above
models for N periods and J projects.
According to Table 2, even with 50 projects in a 20-
year horizon, the problem can still be solved by exact
optimisation methods. Since in real world, the length
of a planning horizon is hardly more that 20 years, and
the number of projects rarely exceeds 50, the proposed
(13) model can provide precise results without any need for
heurisc or metaheuristic approches.
To study the behaviour of the proposed model, 3
problems with 3 different sizes – small (6 periods and
(14)
4 projects), medium (8 periods and 7 projects) and
large (13 periods and 10 projects) – are solved. The first
problem, which was originally investigated by Kachani
and Langella (2005), is solved for different values of v,
(15)

resulting in different lengths of change interval â ij, and
for different values of protection level Γ (the values fall
between 0 and 4 and are increased by 0.2 at every step).
The results for decision variables are shown in Figure 1.
According to Figure 1, it is obvious that changes in
interval length has no effect on the behaviour of the
model. The bigger the interval, the more conservative
the model. According to the stability of the model, the
coefficient of the radius of changes is considered con-
stant and equal to 10% in the rest of the paper:
â ij
𝜈 = 10% ≥ = 0.1 ≥ â ij = 0.1aij
aij
Figures 2 and 3 show the effect of changing the protec-
tion level from 0 to 4 (the max value) on the objective
function and the lending amount.
According to the mentioned diagrams, when the
protection level is zero, ie, all the incoming and out-
going financial flows are deterministic, the optimum
strategy is to investigate in projects 1 and 3. However,
when there is uncertain data and the protection level
is 0.4, no project is worth investing in. The best deci-
sion in this case is to apply the lending policy and use
the profit of loans. According to Figure 3, the lending
amount for this purpose would be increased accord-
ing to the increase in the protection level. The robust
model provides a decision-maker with the optimised
solution in an uncertain situation. In other words, using
this model, a decision-maker understands that all the
projects lose their economic attraction when there is
minimum uncertainty in data.
Figures 4 and 5 show the results of solving the two
other problems using the proposed model.
Figure 1. Solving the model for different uncertainty intervals: (A). 5% (B). 10% (C). 15%, and (D). 20%.
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY   1109
As is observed, the model behaves similalrly for the
three different problems. An increase in the protection
level worsens the objective function, which shows unfa-
vourable deviations. This is the cost of taking uncertainty
into account. At a certain point, the objective function
reaches its maximum value and then it remains constant
since uncertainty function has reached its maximum
value. Moreover, when the problem gets larger and the
number of uncertain parameter increases, there is more
flexibility in changing the protection level. Results of
solving the problems using three different models are
shown in Tables 3–5.
(24)
7.  Discussion and implications
In this section, first the advantages of the goal pro-
gramming model over the basic time horizon model
are explained. Second, the advantages of the robust goal
programming model over the goal programming model
are discussed.
As mentioned previously, goal programming causes
the constraints to be less strict and the solution space to
be larger. Since the constraints are on the budget for each
period and the budgets are flexible, the constraints are not
rigid and they can be used in a goal programming model.
In addition, managers usually expect to gain a certain
amount of liquidity at the end of the horizon. Therefore,
a certain goal can be defined for the objective function of
the basic model, ie, the amount of liquidity. Finally, posi-
tive deviation from liquidity goal and negative deviations
from the budget should be minimised. Consequently,
the solution space becomes bigger and the goal would
be to achieve a certain amount of liquidity. Parameter
gamma or the protection level is defined as the number
1110   F. GHASEMI BOJD AND H. KOOSHA
Figure 2.  Objective function according to protection level
changes for prblem 1.
Figure 3.  Lending amount according to protection level
changes for problem 1.
Figure 4.  Objective function according to protection level
changes for problem 2.
of uncertain parameters which are likely to deviate from
their initial values. Therefore, the value of gamma will be
in the interval [0, Ji], where Ji is the number of projects in
period i. This value is not necessarily an integer. When
the protection level is equal to zero, the problem will be
deterministic, ie, goal programming time horizon cap-
ital budgeting problem. As is clear from the examples,
when gamma is equal to zero, the objective function is
at its minimum value; an increase in the protection level
Figure 5.  Objective function changes according to protection
level changes for problem 3.
Table 2. Dimensions of the basic, goal programming, and
robust goal programming models.
Number of con-
straints Number of variables
Basic model N+J+1 J+2N+2
Goal programming N+J+2 J+4N+6
model
Robust goal program- NJ+4J+2 NJ+3J+5N+7
ming model
value, results in an increase in the objective function. This
implies an increase in unfavourable deviations from goals,
which is not a good sign. However, the cost of finding the
optimum investment policy is shown by the amount of
increase in the objective function. This keeps the solution
feasible when cash flows change in the eligible interval.
Therefore, another advantage of the proposed model is
that it allows a decision-maker to determine the level of
conservation of the model by choosing different values
for gamma, playing with the trade-off between robustness
and the behaviour of the model.
To compare the proposed model with previous ones,
we simulate a situation in which the uncertainty param-
eters change for different coefficients of uncertainty
interval length and different liquidity goals (example
3 in Section 6). This results in 800 different situations.
The performance of the simple robust model (Kachani
& Langella) is compared with that of the robust goal
programming model (the proposed model) under such
conditions. The sum of undesirable deviations for each
case is then calculated and compared between the two
models. The simulation steps are shown in Figure 6.
After solving the problem with simple robust model,
the objective function value is 31,198.7752 for coeffi-
cient of radius of the uncertainty interval of 10%, and
23,854.8117 for coefficient of radius of the uncertainty
interval of 20%. Considering several values for liquidity
goal including 23,854.8117 and 31,198.7752, and with
different radius of the uncertainty interval, many con-
ditions for simulation are defined. For each condition,
100 cases of changing cash flows are designed and by

Table 3. Results of solving problem 1.
Liquidity goal = 962.7264
Robust model Goal model
Chosen projects – –
Objective function 962.7264 0 0
Finial liquidity 962.7264 962.7264
Table 4. Result of solving example 2.
Liquidity goal = 9177.2694
Robust model Goal model
Chosen projects 1, 3, 4, 5 4, 5
Objective function 9177.2694 0 0
Finial liquidity 9177.2694 9472.774
putting solutions in changed constraints, unfavourable
deviations are calculated for two models. Afterwards,
these amounts for two models are campared in each case.
Results of the simulation, ie, the percentage of cases in
which the proposed model functions better and leads
to smaller deviations when the cash flows change, are
shown in Table 6. The results show that the proposed
model outperformed the simple robust one.
We observe that when the liquidity goal in the pro-
posed model is equal to the optimal objective function of
the simple robust model (final liquidity), the two models
show similar performance. However, if the liquidity goal
is less than the optimal liquidity of the simple robust
model, the amount of undesirable deviations are smaller
in the proposed model in more than 60% of cases. In
addition, the proposed model is more successful for
smaller liquidity goals.
Another advantage of the proposed model is that
the value of the liquidity goal can be considered bigger
than the optimal solution of the simple robust model.
Although in this case, undesirable deviations from the
budget in the proposed model are more than those in
the other one, the sum of deviations from the budget
and from the liquidity goal are less. More importantly,
the proposed model gives a decision-maker the oppor-
tunity to study such conditions. If the goal is to achieve
a bigger liquidity at the end of the planning horizon, the
decision-maker can adjust the model accordingly; This is
not possible in the simple robust model. The remaining
deviations show the surplus investing needed apart from
borrowing to achieve the desired liquidity goal. In fact,
the proposed model gives the decision-maker a more
general and flexible point of view.
8. Conclusion
In this paper, a new approach for modelling the capi-
tal budgeting problem is proposed which can deal with
uncertainty and has soft constraints so that achieving
a good solution is still possible. The proposed model
is a robust goal programming model in which robust
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY   1111
Liquidity goal = 9032
Robust goal model Goal model Robust goal model
– 1, 3 –
3189.2528 3242.8601
962.7264 9032 9032
Liquidity goal = 10,000
Robust goal model Goal model Robust goal model
1, 3, 4, 5 3, 4, 5 1, 3, 4, 5
0 166.7019
9177.2694 10,632.349 10,000
optimisation is used to tackle with uncertainty and goal
programming is used to increase flexibility. The model
was used to solve three problems of different sizes.
Regardless of the size of the problem, the model is con-
sistent with changes in the protection level. Finally, the
results are compared with those of previous models and
the advantages of the proposed model are shown. For
example, the proposed model has the ability to achieve
more than one goal and make the constraints less rigid,
so that the problem space is bigger but still feasible. The
model gives decision-makers the opportunity to set their
desired liquidity goal and calculate surplus investing
needed for reaching that goal. In addition, the robustness
of the model helps decision-makers to be more certain
of the solution, since the final solution remains feasible
despite changes in uncertain parameters. The model has
also the advantage of choosing the value of the protec-
tion level, which enables decision-makers to adjust the
conservation level of the model, considering the trade-
off between the behaviour of the model and the level of
conservation. In generall, the proposed model gives the
decision-maker a more general and flexible point of view.
In this paper, cash flows have been assumed to
belong to a symmetric and bounded interval set. Future
research can consider other sets, such as the ellipsoi-
dal set for uncertain behaviour of cash flows. Similarly,
lending and borrowing interest rate can be considered as
uncertain parameters. Moreover, lending and borrowing
constraints can be included.
The statement of contribution
Wrong decision-making for selecting projects can waste
the firm capital and also causes opportunity cost and
negative long-time consequences. Thus, capital budg-
eting and capital rationing are important problems.
Nevertheless, the extant literature does not address these
two issues simultaneously. Some of the main parame-
ters of these problems, eg, cash flows, are not determin-
istic. In addition, constraints of the capital budgeting
problem are budget constraints and accordingly are soft
1112   F. GHASEMI BOJD AND H. KOOSHA

1. Solving the problem with simple robust model

2. Considering various liquidity goals and solving the problem with robust
goal programming model (proposed model)

3. Simulating the situation in which cash flows deviate from their nominal
amounts

4. Putting the obtained solutions in steps 1 & 2 in the constraints with

changed cash flows and calculating the deviations for each solution

5. Comparing deviations produced by the two models

Figure 6. Simulation steps.

Table 5. Result of solving example 3.

Liquidity goal = 31,198.7752 Liquidity goal = 100,000
Robust model Goal model Robust goal model Goal model Robust goal model
Chosen projects 1, 2, 3, 4, 6 3, 6 3, 4, 6 1, 2, 3, 4, 6, 8, 10 1, 2, 3, 4, 6
Objective function 31,198.7752 0 0 5692.997 6840.2936
Finial liquidity 31,198.7752 31,198.7752 31,198.7752 100,000 100,000

Table 6. Comparison of the proposed model with the simple ORCID

robust model.
ѵA 20,000 23,854.8117 30,000 31,198.7752
0.1 90% 78% 62% Same results
0.2 81% Same results 100% 100%
constraints, ie, they can be violated. In this research,
a robust goal programming model for capital budget-
ing is proposed. The constraints are considered as soft
constraints and the model is able to consider multiple
goals. The model considers uncertainty in cashflows and
is flexible for decision-maker demands. Decision-maker
can regulate the conservation and protection level of
the model. Budget deviations could show the surplus
investing needed to achieve liquidity goal.
The results are compared with previous models and
the advantages of the proposed model are shown, ie, the
proposed model has the opportunity to achieve more
than one goal and making the constraints less rigid, we
may have a bigger feasible region. Also, the robustness of
the model let the decision-maker to be more certain of
the solution and with a change in uncertain parameters,
the final solution remains feasible. The model also has
the advantage of choosing the value of the robust index,
which enables the decision-maker to regulate the conser-
vation level of the model and make a trade-off between
the behaviour of the model and the level of conservation.
Disclosure statement
No potential conflict of interest was reported by the authors.
Hamidreza Koosha   http://orcid.org/0000-0002-5155-0040
100,000
100%
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