Multiple Variable Pareto Analysis as Focal Point for Capital Project Selection with Multiple Objectives
29 Pages Posted: 8 Nov 2014
Date Written: November 27, 2013
Capital project proposals can include quantified impacts in customer, environmental and other nonfinancial objectives of the firm. This paper proposes Multiple Variable Pareto Analysis, an extension of pareto analysis used in quality management, which achieves something like 70% of benefits in each of multiple variables, for 30% of the total costs of all investments. Less than the proverbial 80/20 yield is expected for each variable when there is more than one objective. The paper proposes a linear programming approach that achieves equal benefits in each of multiple nonfinancial benefit dimensions and, in a second stage, can yield an internal pricing interpretation. Refinements can accommodate discreteness and interdependencies of projects, budget constraints, and use of external information on relative value of benefits. This is a prospective tool that, in combination with other decision support tools, may be widely applicable as a simple, interpretable starting point in facilitating rational decision-making in many managerial settings that involve multiple nonfinancial objectives.
JEL Classification: O1
Suggested Citation: Suggested Citation