A model for optimal resource allocation in the capital budgeting framework

Moder and Nicki (MN) presented in a recent issue of this journal a resource allocation model in the context of an urban renewal framework. This model was developed under “certainty” assumption. The present paper extends the MN model to “risk” conditions in the capital budgeting framework of a firm. The paper defines an appropriate measure of risk and explicitly introduces the possibilities of borrowing and lending in the model. Further analysis shows that slight variations of the constraints in the model yield important long-run policy guidelines to the management for resource allocation purposes.