Operations Research

Assignment 1
January 14, 2017

PRM-37
Batch: 2016-18
Instructor: Shivshanker Singh Patel
Due Date: 18/01/2017 (23:59:59 Hrs.)
TA: Kaushik Survigaya
Late submission will be not accepted (in special case you have to sacrifice 10%
of total assignment weight)

1.

Problem/Case 1

After Geeta Bakshi graduated from IIM Lucknow with a degree in management, she
went to work for a Investment firm in the Mumbai area. As a student at lucknow, Geeta
paid her normal monthly living expenses for hostel rent, food, and entertainment out
of a bank account set up by her parents. Each month they would deposit a specific
amount of cash into Geetas account. Her parents also paid her telephone, and bank
credit card bills, which were sent directly to them. Geeta never had to worry about
things like health, car, homeowners, and life insurance; utilities; drivers and car licenses;
magazine subscriptions; and so on. Thus, while she was used to spending within a
specific monthly budget in college, she was unprepared for the irregular monthly liabilities
she encountered once she got a job and was on her own.
In some months Geetas bills would be modest and she would spend accordingly,
only to be confronted the next month with a large insurance premium, or a bill for property
taxes on her condominium, or a large credit card bill, or a bill for a magazine subscription,
and so on the next month. Such unexpected expenditures would result in months when
she could not balance her checking account; she would have to pay her bills with her
bank credit card and then pay off her accumulated debt in installments while incurring
high interest charges. By the end of her first year out of school, she had hoped to have
some money saved to begin an investment program, but instead she found herself in
debt.
Frustrated by her predicament, Geeta decided to get her financial situation in order.
First, she sold the condominium that her parents had helped her purchase and moved
into a cheaper apartment. This gave her enough cash to clear her outstanding debts,
with $3,800 left over to start the new year with. Geeta then decided to use some of the
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Assignment 1 - OR - PRM37 - Shivshanker Singh Patel

management science she had learned in college to help develop a budget. Specifically,
she decided to develop a mathematical model to help her decide how much she should
put aside each month in short-term investments to meet the demands of irregular monthly
liabilities and save some money.
First, Geeta went through all her financial records for the year and computed her
expected monthly liabilities for the coming year, as shown in the following table:
Month

Bills ($)

Month

Bills ($)

Jan
Feb
Mar
Apr
May
June

2,750
2,860
2,335
2,120
1,205
1,600

July
Aug
Sep
Oct
Nov
Dec

3,050
2,300
1,975
1,670
2,710
2,980

Geetas after-taxes-and-benefits salary is $29,400 per year, which she receives in 12

equal monthly paychecks that are deposited directly into her bank account.
Geeta has decided that she will invest any money she doesnt use to meet her
liabilities each month in either 1-month, 3-month, or 7-month short-term investment
vehicles rather than just leaving the money in an interest-bearing checking account. The
yield on 1-month investments is 6% per year nominal; on 3-month investments, the
yield is 8% per year nominal; and on a 7-month investment, the yield is 12% per year
nominal. As part of her investment strategy, any time one of the short-term investments
comes due, she uses the principal as part of her budget, but she transfers any interest
earned to another long-term investment (which she doesnt consider in her budgeting
process). For example, if she has $100 left over in January that she invests for 3 months,
in April, when the investment matures, she uses the $100 she originally invested in her
budget, but any interest on the $100 is invested elsewhere. (Thus, the interest is not
compounded over the course of the year.)
Geeta wants to develop a model to maximize her investment return during the year so
she can take that money and reinvest it at the end of the year in a longer term investment
program. However, she doesnt have to confine herself to short-term investments that
will all mature by the end of the year; she can continue to put money toward the end of
the year in investments that wont mature until the following year. Her budgeting process
will continue to the next year, so she can take out any surplus left over after December
and reinvest it in a long-term program if she wants to.
1-(a) Help Geeta develop a model for the year that will meet her irregular monthly
financial obligations while achieving her investment objectives and solve the model.
1-(b) If Geeta decides she doesnt want to include all her original $3,800 in her budget
at the beginning of the year, but instead she wants to invest some of it directly
in alternative longer-term investments, how much does she need to develop a
feasible budget?
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Assignment 1 - OR - PRM37 - Shivshanker Singh Patel

2.

Problem/case 2

Manali Bajaj is the manager of Sealine a shipping and transport company. She is in the
process of negotiating a new shipping contract with Zest, a company that manufactures
chemicals for industrial use. Zest wants Sealine to pick up and transport waste products
from its six plants to three waste disposal sites. Manali is very concerned about this
proposed arrangement. The chemical wastes that will be hauled can be hazardous
to humans and the environment if they leak. In addition, a number of towns and
communities in the region where the plants are located prohibit hazardous materials
from being shipped through their municipal limits. Thus, not only will the shipments
have to be handled carefully and transported at reduced speeds, they will also have to
traverse circuitous routes in many cases.
Manali has estimated the cost of shipping a barrel of waste from each of the six
plants to each of the three waste disposal sites as shown in the following table:
Waste Disposal Site
Plant

Site 1

Site 2

Site 3

Plant 1
Plant 2
Plant 3
Plant 4
Plant 5
Plant 6

$12
14
13
17
7
22

$15
9
20
16
14
16

$17
10
11
19
12
18

The plants generate the following amounts of waste products each week:
Plant

Waste per Week (bbl)

Plant 1
Plant 2
Plant 3
Plant 4
Plant 5
Plant 6

35
26
42
53
29
38

The three waste disposal sites at site 1, site 2, and site 3 can accommodate a
maximum of 65, 80, and 105 barrels per week, respectively.
In addition to shipping directly from each of the six plants to one of the three waste
disposal sites, Manali is also considering using each of the plants and waste disposal
sites as intermediate shipping points. Trucks would be able to drop a load at a plant or
disposal site to be picked up and carried on to the final destination by another truck, and
vice versa. Sealine would not incur any handling costs because Zest has agreed to take
care of all local handling of the waste materials at the plants and the waste disposal
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Assignment 1 - OR - PRM37 - Shivshanker Singh Patel

sites. In other words, the only cost Sealine incurs is the actual transportation cost. So
Manali wants to be able to consider the possibility that it may be cheaper to drop and
pick up loads at intermediate points rather than ship them directly.
Manali estimates the shipping costs per barrel between each of the six plants to be
as follows:
Plant
Plant

Plant 1

Plant 2

Plant 3

Plant 4

Plant 5

Plant 6

Plant 1
Plant 2
Plant 3
Plant 4
Plant 5
Plant 6

$
6
5
9
7
8

$6

11
10
12
7

$4
11

3
7
15

$9
10
3

3
16

$7
12
7
3

14

$8
7
15
16
14

The estimated shipping cost per barrel between each of the three waste disposal
sites is as follows.
Waste Disposal Site
Waste Disposal Site

Site 1

Site 2

Site 3

Site 1
Site 2
Site 3

$
12
10

$12

15

$10
15

Manali wants to determine the shipping routes that will minimize Sealines total cost in
order to develop a contract proposal to submit to Zest for waste disposal. She particularly
wants to know if it would be cheaper to ship directly from the plants to the waste sites or
if she should drop and pick up some loads at the various plants and waste sites. Develop
a model to assist Manali and solve the model to determine the optimal routes.