Multiple Variable Pareto Analysis as Focal Point for Capital Project Selection with Multiple Objectives

29 Pages Posted: 8 Nov 2014

See all articles by Donald P. Cram

Donald P. Cram

State University of New York, Oswego

Date Written: November 27, 2013

Abstract

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

Cram, Donald P., Multiple Variable Pareto Analysis as Focal Point for Capital Project Selection with Multiple Objectives (November 27, 2013). Academy of Business Research Journal, Vol. IV, December 2013. Available at SSRN: https://ssrn.com/abstract=2519731

Donald P. Cram (Contact Author)

State University of New York, Oswego ( email )

307 Rich Hall
Oswego, NY 13126
United States
315-312-2533 (Phone)

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