CAPITAL BUDGET DECISION-MAKING IN LOGISTICS

Background: Capital budgeting decisions in the logistics industry often combine three distinct characteristics. Firstly, they relate to capital assets – such as vehicles or equipment – being periodically replaced with different useful lives and efficiency features, and secondly, their performance is subject to particular operating and market risks. Lastly, externalities, such as regulatory interventions and technological evolution, also contribute to innovation – and thus also uncertainty – becoming a significant factor in logistics. Accordingly, this paper develops a valuation model which takes these characteristics into account and facilitates a robust decision-making process.

Methods: In order to properly capture the specifics of the problem, the proposed model is based on an application of the Life Cycle Cost budgeting method benchmarked to an appropriate functional unit, combined with the Monte Carlo simulation and sensitivity analyses of relevant risk factors.

Results: A realistic case study was developed, providing the necessary input parameters for the method's application. It was thus demonstrated that it provides useful and coherent resources for the decision-making process, including the tools needed to test various assumptions and determine project risks.

Conclusions: The presented model and its solution provide results which are superior compared to conventional capital budgeting methods in terms of properly capturing the essential value-determining factors for a common type of problem encountered in logistics. They are also adequately comprehensive to be applied by practitioners in a real-life managerial setting.

A part of this study was presented as oral presentation at the „8th International Logistics Scientific Conference  WSL FORUM 2019” in  Poznan (Poland), 18th-19th of November 2019.