Abstract

Capital budgeting is the planning process used to determine the best long-term investment options for an organization. Usually, projects compete for limited available capital and hence the problem is to find the best way of prioritizing the projects in accordance with the organization objectives and then allocating available capital in an optimal manner that will maximize profit. The commonly used methods are quantitative in nature and these methods fail to take into consideration the qualitati ve factors which are real factors that can and may affect the outcome of project appraisals. In this study, an integrated analytic hierarchy process- linear programming (AHP-LP) model was developed to address the capital budgeting problem. AHP, which has the capability of catering for both quantitative and qualitative factors, was used to prioritize the competing projects according to the subjective judgments of top management and planning managers, in line with the organisation objectives. Subsequently, a linear programming model was constructed, using the priority ratios (weights) obtained from the AHP model as the coefficients of the decision variables to allocate the available capital in an optimal manner that ensured the maximization of the desired benefits. The combined model was then applied to an organisation based in Nigeria. A comparison of the result of the traditional methods and that of the AHP-LP method clearly shows that qualitative factors have a significant impact on capital budgeting. It was discovered that some projects selected by the traditional methods were dropped when the qualitative factors were introduced using AHP. The AHP-LP budget also reflected the objectives set for the organisation by the top management. The combined method was also found to be more flexible, efficient and easily modifiable.

Key words: Integrated, analytic hierarchy process- linear programming model, capital budgeting.