This thesis deals with the capital budgeting problem of a firm where investments are risky and interrelated.
The established models might be classified into two categories; One is the chance-constrained programming model and the other is the expected utility maximization model. The former has a rather limited objective function and does not consider the risk in direct manner. The latter, on the other hand, might lead to a wrong decision because it uses an approximate value of expected utility.
This thesis attempts to extend the applicability of the chance-constrained programming model by modifying its objective function into a more general form.
The capital budgeting problem is formulated as a nonlinear 0-1 integer programming problem first, and is transformed into a linear 0-1 integer programming problem for finding a lower-bound solution of the original problem. The optimal solution of the original problem is then obtained by branch-and-bound algorithm. An illustrative example is given together with the computer program for the solution procedure.
