SOLUTION TO PROBLEMS FROM HW SET # 2

1) NPV Calculations: Project 1: NPV = -$4,075; Project 2: NPV = $1,491

Project 3: NPV = $2,916; Project 4: NPV = $1,523; Project 5: NPV = $7,066
Project 6: NPV = $6,585
i) With Fractional Investments:
Decision variable definition:
Xj = Fraction of investment of project j. For j = 1,2,3, . . . ,6.
Find X1, X2, . . . ,X6 so as to
MaxZ 4075X1 1429X 2 2916X 3 1523X 4 7066X 5 6585X 6
Subject to:
Dual
Y1 10,000 X 1 +15,000 X 2 +20,000 X 3 +30,000 X 4 +40,000 X 5 +35,000 X 6 97,500

Y2 5,000 X 1 +10,000 X 2 +12,000 X 3 +15,000 X 4 -5,000 X 5 29,000

Y3 X1 1

Y4 X2 1
Y5 X3 1

Y6 X4 1

Y7 X5 1

Y8 X6 1

X j 0 For all j

Dual:
Find Y1, Y2, Y3, . . . ,Y8 so as to
MinW = 97,500 Y1 +29,000 Y2 + Y3 + Y4 + Y5 + Y6 + Y7 + Y8
Subject to:
X1 10,000 Y1 + 5,000 Y2 + Y3 4075

X2 15,000 Y1 +10,000 Y2 + Y4 1491

X3 20,000 Y1 +12,000 Y2 + Y5 2916

X4 30,000 Y1 +15,000 Y2 + Y6 1523

X5 40,000 Y1 -5,000 Y2 + Y7 7066

X6 35,000 Y1 + Y8 6585

Y j 0 For all j

ii) Without Fractional Investment

Decision Variable Definition
X j ={ 0 if project j is not selected}

{ 1 if project j is selected for j = 1,2, . . ., 6}

Find X1, X2, . . . ,X6 so as to
Max Z 4075X1 1429X 2 2916X 3 1523X 4 7066X 5 6585X 6
Subject to:
10,000 X 1 +15,000 X 2 +20,000 X 3 +30,000 X 4 +40,000 X 5 +35,000 X 6 97,500

5,000 X 1 +10,000 X 2 +12,000 X 3 +15,000 X 4 -5,000 X 5 29,000

X j = 0 or 1, j = 1,2, . . . ,6

2) Objective Function Same as for #1 (without Fraction investments)

Subject to:
10,000 X 1 +15,000 X 2 +20,000 X 3 +30,000 X 4 +40,000 X 5 +35,000 X 6 97,500

5,000 X 1 +10,000 X 2 +12,000 X 3 +15,000 X 4 -5,000 X 5 29,000

X1 X 2 X 3 1

X2 X4 0
X j = 0 or 1, j = 1,2, . . . ,6

3) Assume that fractional funding is NOT allowed

NPV Calculations: Project A: NPV = 266; Project B: NPV = 753
Project C: NPV = 683 (rounded to the nearest dollar)
Decision variables: Xj = 0, if project j is not selected,
= 1, if it is selected.
Find X A , X B , X C so as to

MaxZ 266X A 754X B 683X C

Subject to:
5,000X A 7,000X B 8,500X C 13,000 (year 0)

( 1,319X A 1942X B 2,300X C 3,500) ( year 1) which is written as

1,319X A 1942X B 2,300X C 3,500 (year 1)

( 1,319X A 1,942X B 2,300X C 1,200) ( year 2) which is written as

1,319X A 1,942X B 2,300X C 1,200 (year 2)

XC XA 0

X A , X B , X C 0 or 1
{Value of extra budget money @ t=2 is 0}
4) Assume that fractional funding is NOT allowed
NPV Calculations: Project A: NPV = 1536; Project B: NPV = 2026
Project C: NPV = 2547 (rounded to the nearest dollar).
Decision variables: Xj = 0, if project j is not selected,
= 1, if it is selected.
Find X A , X B , X C so as to

MaxZ 1536 X A 2026 X B 2547 X C

Subject to:
8,000X A 5,000X B 10,000X C 16,000 (year 0)

( 1,900 X A 1,400 X B 2,500 X C 4,000) ( year 1) which is written as

1,900 X A 1,400 X B 2,500 X C 4,000 (year 1)

( 1,900 X A 1,400 X B 2,500 X C 1,300) ( year 2) which is written as

1,900 X A 1,400 X B 2,500 X C 1,300 (year 2)

XA XB 0
X A , X B , X C 0 or 1
{Value of extra budget money @ t=2 is 0}
5) Decision variables: Xj = fractional level of funding of project j, j = 1,2,3,4.
Find Xj , j = 1,2, 3, 4
So as to:
MaxZ 1,592X1 930X 2 1,344X 3 681X 4
Subject to:
Dual
Y1 1,000 X 1 +2,000 X 2 +1,000 X 3 +3,000 X 4 5,000

Y2 500 X 1 +1,000 X 2 +800 X 3 +1,000 X 4 4,000

Y3 X1 1

Y4 X2 1
Y5 X3 1

Y6 X4 1

X j 0 For all j

b) Y1 =681/3000=.23
Y2 =0 (surplus capital @ t=1)
Y3 proj. 1: cost = 1000*.23 = $230
Return = 1592
Net cash inflow = 1592-230 = 1362
Y4 proj. 2: cost = 2000*.23 = $460
Return = 930
Net cash inflow = 930 460 = 470
Y5 proj. 3: cost = 1000*.23 = $230
Return = 1344
Net cash inflow = 1344-230 = 1114
Y6 =0
Y1 =$0.23; Y2 =0; Y3 =$1362; Y4 =$470; Y5 =$1,114, Y6 =0