Information technology capital budgeting using a knapsack problem

In this paper, we describe an information technology capital budgeting (ITCB) problem, show that the ITCB problem can be modeled as a 0–1 knapsack optimization problem, and propose two different simulated annealing (SA) heuristic solution procedures to solve the ITCB problem. Using several simulations, we empirically compare the performance of two SA heuristic procedures with the performance of two well‐known ranking methods for capital budgeting. Our results indicate that the information technology (IT) investments selected using the SA heuristics have higher after‐tax profits than the IT investments selected using the two ranking methods.