Application of the calculus of variations to financing alternatives

Rw Grubbström and Sh Ashcroft

Omega, 1991, vol. 19, issue 4, 305-316

Abstract: The problem considered is to choose from a finite set of inter-related investment and financing alternatives and also levels of consumption/work over time in order to maximise a utility functional. Each investment and financing option is characterised by its cash flow over time. An inter-temporal budget requirement operates continuously. Application of Calculus of Variations leads to consideration of the Euler-Lagrange equations combined with Kulm-Tucker conditions. It is shown that the solution (also when there are logical dependencies present) requires the maximisation of a Generalised Net Present Wealth measure in which the discount factor is formed from an integral of the Lagrangean multiplier function.

Keywords: financial; investment; calculus; of; variations; Lagrange; multipliers; net; present; value (search for similar items in EconPapers)
Date: 1991
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Citations: View citations in EconPapers (10)

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