An Application of the Decomposition Principle to Financial Decision Models

James R. Morris

Journal of Financial and Quantitative Analysis, 1975, vol. 10, issue 1, 37-65

Abstract: Linear programming models of specialized financial decision problems such as working capital management [21], short-term financing [22], or capital bug-geting [24] are deficient in that they may lead to decisions which are suboptimal with respect to the firm as a whole. Each model attacks a single decision problem and neglects its interaction with the other activities of the firm. On the other hand, a model which reflects these interdependences and interactions by including the various financing, investment, and operating decisions in a single model tends to become excessively large and inefficient to use. What is needed is a model that incorporates the efficiencies inherent in smaller, more specialized models which can be utilized on a decentralized basis and which can simultaneously lead to decisions that are optimal for the firm as a whole.

Date: 1975
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