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The research reported in this paper used Monte Carlo simulation to study the long term effects of borrowing policy on the rate of growth of capital and the risk (probability) of ruin of hypothetical firms, operating in explicitly described, realistic capital budgeting environments. The capital rationing environment is described explicitly. The debt policies modeled were based on the results of interviews with senior financial executives in eight major firms. The results indicate that three intuitively appealing ranking procedures performed equally well and all out-performed a random selection decision procedure: yielding higher rates of capital growth with lower risks of ruin. In general, an aggressive borrowing policy resulted in a higher average capital growth rate for a firm but a conservative borrowing policy resulted in a lower risk of min. It is believed that the results provide some interesting insights which indicate that a computer simulation model could be used to aid management in the evaluation of their capital budgeting procedures and borrowing policies. [ABSTRACT FROM AUTHOR]

This article presents a study on the long term effectiveness of exact and approximate capital rationing procedures under uncertainty and incomplete information in investments. The analytic model, simulation methodology and results described provide, under certain circumstances, strong support to the conjecture that mathematical programming solutions to capital rationing problems confer benefits insufficient to justify their cost and complexity in the great majority of practical applications.