Capturing Risk in Capital Budgeting

This research has the goal of proposing a novel, reusable, extensible, adaptable, and comprehensive advanced analytical process and Integrated Risk Management to help the (DOD) with risk-based capital budgeting, Monte Carlo risk-simulation, predictive analytics, and stochastic optimization of acquisitions and programs portfolios with multiple competing stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The research covers topics of traditional capital budgeting methodologies used in industry, including the market, cost, and income approaches, and explain show some of these traditional methods can be applied in the DOD by using DOD-centric non-economic, logistic, readiness, capabilities, and requirements variables. Stochastic portfolio optimization with dynamic simulations and efficient investment frontiers will be run for the purposes of selecting the best combination of programs and capabilities is also addressed, as are other alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. The results include actionable intelligence developed from an analytically robust case study that senior leadership at the DOD may utilize to make optimal decisions. The main deliverables will be a detailed written research report and presentation brief on the approach to capturing risk and uncertainty in capital budgeting analysis. The report will detail the proposed methodology and applications, as well as a summary case study and examples of how the methodology can be applied.