The Capital Budgeting Problem: A New Framework for the Optimization and Analysis of R&D Investments

Bhandari, Amit V.

doi:10.2139/ssrn.1337793

Download This Paper

Open PDF in Browser

Add Paper to My Library

The Capital Budgeting Problem: A New Framework for the Optimization and Analysis of R&D Investments

33 Pages Posted: 6 Feb 2009 Last revised: 27 Feb 2009

See all articles by Amit V. Bhandari

Amit V. Bhandari

IEMS, Northwestern University

Date Written: February 4, 2009

Abstract

This paper considers a firm facing the problem of optimal allocation of a budget fixed by capital market limitations between the costs of offering a current product and the R&D expenditures required to develop a new one. The risks and rewards associated with both products are allowed to vary with state and decision variables. Different settings based on the characteristics associated with the time to completion for the R&D project and its risk of failure due to external factors are studied and a comprehensive framework for solving the R&D budgeting problem is developed.

Keywords: capital budgeting, R&D, R&D budget, innovation, product, risk

JEL Classification: G31, D21, M21, C61

Suggested Citation: Suggested Citation

Bhandari, Amit V., The Capital Budgeting Problem: A New Framework for the Optimization and Analysis of R&D Investments (February 4, 2009). Available at SSRN: https://ssrn.com/abstract=1337793 or http://dx.doi.org/10.2139/ssrn.1337793