Capital Budgeting in the National Iranian Petrochemical Company Using the Markowitz Model

This paper addresses the capital budgeting efficiency in the National Iranian Petrochemical Company (NPC) from 2007 through to 2011. The proposed target function optimally minimizes the investment risk of the existing assets in portfolio, risk of project completion time, and risk of project non-execution, while it optimizes the allocated budge to each project and maximizes return on investment (ROI) of the present assets in portfolio. The model assumes that total share of the invested assets in the portfolio is always equal to 1, and the constraint Xj ≥ 0 makes sure that share of each asset in portfolio is not negative which in our case it concerns the share of each project from the total budget, project completion time, etc. For prioritization of the goals in the target function, analytic hierarchy process (AHP) techniques are employed which involve economic, technical, and resource sustainability modeled as a linear programming problem. This problem is solved using the technique applied in the Markowitz model. The results indicate significant deviations (risks) of the actually allocated budgets from the optimum resource allocation level.