Chapter 12 Selection from Independent Projects Under Budget Limitation

Solutions to Problems 12.1 The paragraph should mention: independent projects versus mutually exclusive alternatives; limit placed on total capital invested using the sum of initial investment amounts; selection of a project in its entirely or to not select it (do-nothing); and to maximi e the return using some measure such as !" of net cash flo#s at the $%&&. %ny net positive cash flo#s that occur in any project are reinvested at the $%&& from the time they are reali ed until the end of the longest-lived project 'eing evaluated. (This is similar to the assumption made in (ection ).* #hen the composite rate of return is determined+ 'ut here the only rate involved is the $%&&.) ,n effect+ this ma-es the lives e.ual for all projects+ a re.uirement to correctly apply the !" method. There are 20 1 12 possi'le 'undles. 3onsidering the selection restrictions+ the 4 via'le 'undles are: 56 1 / 0 1/ 2/ /0 12/ 2/0

12.2

12./

6ot accepta'le 'undles: 2+ 12+ 10+ 20+ 120+ 1/0+ 12/0 12.0 There are 20 1 12 possi'le 'undles. 3onsidering the selection restriction and the 7088 limitation+ the via'le 'undles are: !rojects 56 2 / 0 2+ / 2+ 0 /+ 0 ,nvestment 7 8 1*8 )* 2/* 22* /9* /18

3hapter 12

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12.*

(a) 5evelop the 'undles #ith less than 7/2*+888 investment+ and select the one #ith the largest !" value. ,nitial =undle !rojects investment+ 7 63>+ 7?year !" at 18@+ 7 1 % -188+888 *8+888 122+)02 2 = -12*+888 20+888 /+8/9 / 3 -128+888 )*+888 298+119 0 5 -228+888 /4+888 -11+4/9 * A -288+888 92+888 2/)+020 2 %= -22*+888 )0+888 124+)90 ) %3 -228+888 12*+888 002+920 9 %5 -/28+888 94+888 1*0+98) 4 %A -/88+888 1/2+888 080+289 18 =3 -20*+888 44+888 29/+1*2 11 =A -/2*+888 182+888 208+*88 12 3A -/28+888 1*)+888 *1)+*98 1/ 56 8 8 8 !"1 1 -188+888 B *8+888(!?%+18@+9) 1 -188+888 B *8+888(*.//04) 1 7122+)02 !"2 1 -12*+888 B 20+888(!?%+18@+9) 1 -12*+888 B 20+888(*.//04) 1 7/8/9 !"/ 1 -128+888 B )*+888(!?%+18@+9) 1 -128+888 B )*+888(*.//04) 1 7298+119 !"0 1 -228+888 B /4+888(!?%+18@+9) 1 -228+888 B /4+888(*.//04) 1 7-11+4/4 !"* 1 -288+888 B 92+888(!?%+18@+9) 1 -288+888 B 92+888(*.//04) 1 72/)+022 %ll other !" values are o'tained 'y adding the respective !" for 'undles 1 through *. 3onclusion: (elect !" 1 7*1)+*98+ #hich is 'undle 12 (projects 3 and A) #ith 7/28+888 total investment.

3hapter 12

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

(') >or mutually exclusive alternatives+ select the single project #ith the largest !". This is 3 #ith !" 1 7298+119. 12.2 5etermine !" at 18@ for each single project (ro# 10). 5etermine the feasi'le 'undles (from !ro'lem 12.*) and add the respective !" values (column <). (elect the largest !" value+ #hich is for the 'undle containing projects 3 and A.

3hapter 12

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12.) (a) !" analysis of the 2 via'le 'undles is sho#n 'elo#. 6!C functions are used to find !" values. (elect project = for a total of 7288+888+ since it is the only one of the three single projects #ith !" D 8 at $%&& 1 12@ per year.

(') 3hange the 63> for 'undle * (= and 3) such that the !" is e.ual to !"2 1 742+02). Ese (FGCA& #ith cell >11 as the target cell to find the necessary minimum 63> for 'oth = and 3 of 7/12+2)4 as sho#n 'elo# in cell >) (changing cell).

3hapter 12

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12.9

((olution description on next page.)

3hapter 12

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12.9 (cont.) There are 2 2-project 'undles. >irst spreadsheet sho#s cash flo#s and !" values at 4@ for single projects and 'undles. ,f the 63> for H is 7*8+888+ !rojects "I are selected #ith !"2 1 72**+)2/. $inimum 63> for project H must ma-e !" for either 'undle "H+ JH+ or IH have a !" of at least that of projects "I. Ese (FGCA& (second spreadsheet) to find $in 63> for H 1 748+888 to o'tain min !"2 1 72**+)2/ for projects IH. This is the minimum 63> for H to 'e selected as part of the t#osome. ,f (olver is applied 2 more times the minimum 63> for the other 'undles are as follo#s: !rojects JH "H 12.4 ' 1 7988+888 $in 63> for H 71)8+888 1/8+888 i 1 18@ nj 1 0 years 2 via'le 'undles ( 7 0*+888 -18+888 188+888 /*+888 10*+888 8 !" at 18@ 7-28+))8 -21+*/4 - 2+21* -92+/84K -22+49*K 8

=undle !rojects 1 % 2 = / 3 0 %= * %3 2 5o nothing

63>j8 7-2*8+888 -/88+888 -**8+888 -**8+888 -988+888 8

63>jt 7 *8+888 48+888 1*8+888 108+888 288+888 8

!"j 1 63>j(!?%+18@+0) B ((!?>+18@+0) - 63>j8 K%dd single-project !" values for j 1 0 and *. (ince !" L 8 for %+ = and 3+ 'y inspection+ 'undles 0 and * #ill have !" L 8. There is no need to determine their !" values. (ince no !" D 8+ (elect 5F 6FT<,6; project.

3hapter 12

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12.18

(et up spreadsheet and determine that the 5o 6othing 'undle is the only accepta'le one #ith !" 1 7-2214. (a) (ince the initial investment occurs at time t 1 8+ maximum initial investment for 3 at #hich !" 1 8 is -**8+888 B (-2214) 1 7-*0/+)91 (') Ese (FGCA& #ith the target cell as 511 for !" 1 8. &esult is $%&& 1 4.*19@ in cell =1.

3hapter 12

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12.11

(a) There are 29 1 2*2 separate 'undles possi'le. Fnly 1+ 2 or / projects can 'e accepted. "ith ' 1 7088+888 and selection restrictions+ there are only 0 via'le 'undles. =undle 1 2 / 0 !rojects 2 * 9 2+) ,nitial investment+ 7 -/88+888 -14*+888 -088+888 -088+888 !" at 18@+ 7 /*+888 12*+888 118+888 4)+888

(elect project * #ith !" 1 712*+888 and 714*+888 invested. This assumes the remaining 728*+888 is invested at the $%&& of 18@ per year in other investment opportunities. (') The second 'est choice is project 9 #ith !" 1 7118+888. This is a good choice+ since it invests the entire 7088+888 at a rate of return in excess of the 18@ $%&& since !" is significantly a'ove ero. 12.12 (a) >or ' 1 7/8+888 only * 'undles are via'le of the /2 possi'ilities. ,nitial =undle !rojects investment+ 7 !" at 12@+ 7 1 ( -1*+888 9+*08 2 % -2*+888 12+/2* / $ -18+888 /+888 0 A -2*+888 18 * ($ -2*+888 11+*08 (elect project % #ith !" 1 712+/2* and 72*+888 invested. (') "ith ' 1 728+888+ 11 more 'undles are via'le. =undle 2 ) 9 4 18 11 12 1/ 10 1* 12
3hapter 12

!rojects < (% (A (< %$ %A $A $< (%$ ($A %$A

,nitial investment+ 7 -08+888 -08+888 -08+888 -**+888 -/*+888 -*8+888 -/*+888 -*8+888 -*8+888 -*8+888 -28+888
9

!" at 12@+ 7 1*+/*8 28+92* 9+**8 2/+948 1*+/2* 12+//* /+818 19+/*8 2/+92* 11+**8 1*+//*

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

(elect projects ( and < #ith !" 1 72/+948 and 7**+888 invested. (% close second are projects (+ % and $ #ith !" 1 72/+92* and 7*8+888 invested.) (c) (elect all projects since they each have !" D 8 at 12@.
12.1/ (a) The 'undles and !" values are determined at $%&& 1 1*@ per year.

=undle 1 2 / 0 * 2 )

!rojects 1 2 / 0 1+/ 1+0 /+0

,nitial investment+ 7 -1.* mil -/.8 -1.9 -2.8 -/./ -/.* -/.9

63>+ Gife+ 7 per year years /28+888 9 288+888 18 *28+888 * 928+888 0 998+888 1-* /28+888 2-9 1+198+888 1-0 /28+888 *-9 1+/08+888 1-0 *28+888 *

!" at 1*@ 711*+029 11+298 - *2+9*2 /01+188 *9+*)2 0*2+*29 290+200

(elect !" 1 70*2+*29 for projects 1 and 0 #ith 7/.* million invested.

3hapter 12

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12.1/ (cont) (') (et up a spreadsheet for all ) 'undles. (elect projects 1 and 0 #ith the largest !" 1 70*2+*19 and invest 7/.* million.

3hapter 12

18

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12.10 (a) (preadsheet sho#s the solution. (elect projects 1 and 2 for a 'udget of 7/.8 million and !" 1 7)*/+1/4.

3hapter 12

11

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.10 (cont) (') Ese (FGCA& #ith the target cell 51) to e.ual 7)*/+1/4. &esult is a re.uired year one 63> for project / of 721)+)2/ (cell 5)). <o#ever+ #ith this increased 63> and life for project /+ the 'est selection is no# projects 1 and / #ith !" 1 7922+9/8 (cell >1)).

!rojects 1 and / are no# the 'est selection.

3hapter 12

12

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.1*

=udget limit+ ' 1 712+888 =undle 1 2 / 0 * 2 ) !rojects 1 2 / 0 1+2 1+/ 1+0 ,nvestment 7-*+888 - 9+888 - 4+888 -18+888 -1/+888 -10+888 -1*+888

$%&& 1 12@ per year 63> for years 1 through * 71888+1)88+2088+ /888+/988 *88+*88+*88+ *88+18*88 *888+*888+2888 8+8+8+1)888 1*88+2288+2488+ /*88+10/88 2888+2)88+0088+ /888+/988 1888+1)88+2088+ 28888+/988 !" at 12@ 7/814 - *2/ 9)0 980 2042 /94/ /92/

(ince !"2 1 7/94/ is largest+ select 'undle 2+ #hich is projects 1 and /.

3hapter 12

1/

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.12 (preadsheet solution for !ro'lem 12.1*. !rojects 1 and / are selected #ith !" 1 7/94/.

12.1) >or the 'undle comprised of projects / and 0+ the net cash flo#s are: Iear 63> 8 7-14+888 1 *888 2 *888 / 2888 0 1)+888 *MM 8

Ese A.uation N12.2O to compute the !" value at 12@. The longest-lived of the four is project 2 #ith nG 1 * years. !" 1 -14+888 B N*+888(>?%+12@+2)(>?!+12@+/) B 2+888(>?!+12@+2) B 1)+888(>?!+12@+1)O(!?>+12@+*) 1 -14+888 B N*+888(2.12)(1.0804) B 2+888(1.2*00) B 1)+888(1.12)O(8.*2)0) 1 712)2 The !" value using the 63> values directly is !" 1 -14+888 B*888(!?%+12@+2) B 2888(!?>+12@+/) B 1)+888(!?>+12@+0) 1 -14+888 B *888(1.2481) B 2888(8.)119) B 1)+888(8.2/**) 1 712)) The !" values are the same (allo#ing for round-off error).
3hapter 12 10

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12.19 To develop the 8-1 ,G! formulation+ first calculate !"A since it #as not included in Ta'le 12-2. %ll amounts are in 71888. !"A 1 -21+888 B 4*88(!?%+1*@+4) 1 -21+888 B 4*88(0.))12) 1 720+//8 The linear programming formulation is: $aximi e H 1 /240x1 - 1814 x2 B 0)99 x/ B 2128 x0 B 20+//8 x* 3onstraints: 18+888x1 B 1*+888 x2 B 9888 x/ B 2888 x0 B 21+888 x* L 28+888 x- 1 8 or 1 for - 1 1 to * (a) >or ' 1 728+888: The spreadsheet solution uses the general template in >igure 12-*. $%&& is set to 1*@ and a 'udget constraint is set to 728+888 in (FGCA&. !rojects 3 and 5 are selected (ro# 14) for a 710+888 investment (cell ,22) #ith H 1 718+489 (cell ,2)+ as in Axample 12.1.

3hapter 12

1*

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

(') ' 1 71/+888: %gain+ all amounts are in 71888 units. (imply change the 'udget constraint to ' 1 71/+888 in (FGCA& and o'tain a ne# solution to select only project 5 #ith H 1 72128 and only 72888 of the 71/+888 invested.

3hapter 12

12

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12.14 (a) Ese the capital 'udgeting template #ith $%&& 1 18@ and a 'udget constraint of 7/2*+888. The solution is to select projects 3 and A (ro# 14) #ith 7/28+888 invested and a maximi ed !" 1 7*1)+*9/ (cell ,*).

(') 3hange cell =1 to 12@ and the 'udget constraint to 7*88+888. (olution is (elect projects %+ 3 and A for H 1 7289+/81 and a total of 7028+888 invested.

3hapter 12

1)

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.28 The capital 'udgeting solution #ith $%&& 1 18@ and ' 1 7988+888 is to 5o 6othing since all three projects have !" L 8.

3hapter 12

19

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.28 (cont) (a) To determine that the maximum investment in 3 is 7*0/+)91 using (FGCA&+ set up the solution #ith P1Q in cell 511 to select project 3 only+ target cell as 512 #ith a value of 78+ changing cell as 52 and delete the 'inary constraint. (preadsheet and (FGCA& template are sho#n 'elo#.

(') To find $%&& 1 4.*19@ in cell =1+ use (FGCA& #ith target cell 512 value of 8 and changing cell =1. =e sure the options 'ox on (FGCA& for Passume linear modelQ is not chec-ed and that the tolerance @ is small (see 'elo#).

3hapter 12

14

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.21 (FGCA& can 'e used 0 times. >irst to get the selection of "I #ith H 1 72**+)2/+ or 'y simply o'serving that these have !" D 8 and the sum is this amount. 6o# it gets a little harder for the three 2-project selections of "H+ JH+ and IH. (et up (FGCA& for each selection #ith the target cell A28 as the difference 2**+)2/ R 63> of the other project. >or example+ if " and H are the projects+ the re.uired !" for H is 2**+)2/ R *8+824 1 728*+2*0. The (FGCA& solution for "H is sho#n here #here the minimum 63> for H is 71/8+888 in the changing cell A).

!rojects " and H are selected

The / runs of (FGCA& #ill generate the follo#ing results: !rojects "H JH IH Target value in cell A28 728*+2*0 /21+208 *8+829 $in 63> for H 71/8+888 1)8+888 48+888

The minimum 63> for H is+ therefore+ 748+888 for the selection of the t#o projects I and H.
3hapter 12 28

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12.22 Ese the capital 'udgeting pro'lem template at 1*@ and a constraint on cell ,22 of 70+888+888. (elect projects 1 and 0 #ith 7/.* million invested and H 1 70*2+*19.

3hapter 12

21

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.2/ Anter the 63> values from !ro'lem 12.10 into the capital 'udgeting template and ' 1 7/+888+888 into (FGCA&. (elect projects 1 and 2 for H 1 7)*/+1/4 #ith 7/.8 million invested.

3hapter 12

22

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.20 Anter the 63> values on a spreadsheet and ' 1 712+888 constraint in (FGCA& to o'tain the ans#er: (elect projects 1 and / #ith H 1 7/94/ and 710+888 invested+ the same as in !ro'lem 12.1* #here all via'le mutually exclusive 'undles #ere evaluated 'y hand.

3hapter 12

2/

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

12.2*

=uild a spreadsheet and use (FGCA& repeatedly at increasing values of ' to find the 'est projects and value of H. 5evelop an Axcel chart for the t#o series.

3hapter 12

20

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.

Case Stud% Solution (1) (2) &o#s * and 2 of the spreadsheet sho# the via'le 'undles for the 7/.* million spending limit and the project relationship. !rojects = and 3 #ith !" 1 794*+888 are the economic choices. This commits only 72.2 million of the allo#ed 7/.* million.

(/)

3hange cash flo#s+ investment amount+ life+ etc. to o'tain a !" and overall iK greater than the results for =3 (column ;).

3hapter 12

2*

PROPRI !"R# $"! RI"L. : The $c;ra#-<ill 3ompanies+ ,nc. %ll rights reserved. 6o part of this $anual may 'e displayed+ reproduced or distri'uted in any form or 'y any means+ #ithout the prior #ritten permission of the pu'lisher+ or used 'eyond the limited distri'ution to teachers and educators permitted 'y $c;ra#-<ill for their individual course preparation. ,f you are a student using this $anual+ you are using it #ithout permission.