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

33 Pages Posted: 6 Feb 2009 Last revised: 9 May 2013

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

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

Amit V. Bhandari (Contact Author)

IEMS, Northwestern University ( email )

Evanston, IL 60208-3119
United States

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