Optimal project selection: Stochastic knapsack with finite time horizon

L L Lu (), S Y Chiu and L A Cox
Additional contact information
L L Lu: AT&T Laboratories
S Y Chiu: GTE Laboratories
L A Cox: Cox Associates

Journal of the Operational Research Society, 1999, vol. 50, issue 6, 645-650

Abstract: Abstract A time-constrained capital-budgeting problem arises when projects, which can contribute to achieving a desired target state before a specified deadline, arrive sequentially. We model such problems by treating projects as randomly arriving requests, each with a funding cost, a proposed benefit, and a known probability of success. The problem is to allocate a non-renewable initial budget to projects over time so as to maximise the expected benefit obtained by a certain time, T, called the deadline, where T can be either a constant or a random variable. Each project must be accepted or rejected as soon as it arrives. We developed a stochastic dynamic programming formulation and solution of this problem, showing that the optimal strategy is to dynamically determine ‘acceptance intervals’ such that a project of type i is accepted when, and only when, it arrives during an acceptance interval for projects of type i.

Keywords: capital budgeting; project selection; on-line selection rule; stochastic dynamic programming (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (6)

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DOI: 10.1057/palgrave.jors.2600721

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