A REVIEWS OF “THE ZERO-SUM SOCIETY,by Lester C. Thurov,Basic Books,Inc., New York, 1980, 230 pages,list, $12.95.”

Linear Programming Formulations of capital budgeting under conditions of pure capital rationing frequently assume that the dual variables of the budget constraints muse be equal to the corresponding discount factors. This paper shows that this assumption leads to solutions in which the maximum objective function is zero. From this it follows that the dual variables of the budget constraints are zero for this case as well as for that where lending or carryforward is Included.     

A review of: “CAPITAL BUDGETING: PLANNING AND CONTROL OF CAPITAL EXPENDITURES” by John J. Clark,Thomas J. Hindenlang,and Robert E. Pritchard,Prentice-Hall,Englewook Cliffs,New Jersey, 1979, ix + 468 pages, $22.00 list.

If one wants to Identify the IRR's of a project, it is always helpful to know the interval within which they occur. In his recent paper de Faro presented two approaches to the determination of an upper bound to the IRR's. In the present contribution it is shown how an approach providing an upper bound can readily be applied to establish a corresponding lower bound, and vice versa. Also four powerful new approaches to the formulation of the bounds to a project's IRR's are introduced and evaluated, as well as some interesting “by-products” of the main-stream considerations are discussed. Finally, it is shown that the presented approaches can easily be applied to the determination of bounds for the real zeros of a polynomial.     

Review of: “ EXPERIMENTS ON DECISIONS WIDER RISK: THE EXPECTED UTILITY HYPOTHESIS ” by Paul J. H. Schoemaker,Martinos Nijhoff Publishing,Boston, 1980, xxii + 211 pages,list $18.95.

Almost every capital budgeting textbook has a chapter on the weighted average cost of capital (WACC). Though this is theoretically satisfying, it does not describe how companies actually operate. The WACC calls for a balanced capital structure in which debt and equity are utilized at some predetermined percentage. The problem is that researchers have shown that firms try to avoid selling new shares whenever possible. This leads to the pecking order theory in which firms first use internal funds, then low-risk debt, then high-risk debt, and finally, as a last resort, new common stock. There is no attempt to balance the capital structure. This survey study basically confirms that approach.     

A review of: “ENGINEERING ECONOMY WITH COMPUTER APPLICATIONS”, by Dr. Arup K. Mnllik,Engineering Technology,Inc., Mahomet,Illinois, 1979, 289 pages,list 517.95.

This paper applies option pricing analysis to the problem of valuing the abandonment option of an investment proposal. The assumption is made that the abandonment option is exercisable at only one point in time in the future and that the project's vatue-in-use and its abandonment value are lognormally distributed. The model is employed to measure how the uniqueness of the project asset, as measured by the correlation between these two lognormal random variables, affects the value of the abandonment option. It is shown that the more unique the asset, or the higher the correlation, the lower is the value of the abandonment option. The model is also employed to examine the impact of increased uncertainty in these two random variables on the value of the abandonment option. The relationships are shown to be nonmonotonic. However, beyond critical thresholds, increased uncertainty in either one of the two variables enhances the value of the abandonment option.     

A review of: “FORTY CENTURIES OF WAGE AND PRICE CONTROLS: HOW NOT TO FIGHT INFLATION” by R. L. Schuettinger and E. F. Buttler,Caroline House,Ottawa, Illinois, 1979, 184 pagea,list $9.95.

We show that when a project is financed with amortized debt, traditional capital budgeting procedures may lead to biased net present values. A model is presented, based on the seminal work of Modigliani-Miller, which allows the net present value of a project to be determined by a weighted average cost of capital that varies with the amortization process.

The implications are substantial for financing arrangements such as long term loans, sinking fund debt, leasing, real estate financed by mortgages, and discount debt obligations.