Ayush Ranjan (10231673)

Arushi Pandey (10231577)

Decision Making and uncertainty – Homework 3

Submission by: - Ayush Ranjan (10231673)

Arushi Pandey (10231577)

Q1)

a)

Decision Variable:

1, 𝑖𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖𝑠 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑

𝑌𝑖 = {
0, 𝑖𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖𝑠 𝑛𝑜𝑡 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑

𝐶𝐹𝑖,𝑗 = 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑜𝑟 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑖 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑗, 𝑤ℎ𝑒𝑟𝑒 𝑖 = (1,2,3,4,5) 𝑎𝑛𝑑 𝑗 = (0,1,2,3,4,5)

Objective function:

𝑀𝑎𝑥𝑖𝑚𝑖𝑧𝑒: 𝑌1 ∗ 250 + 𝑌2 ∗ (−50) + 𝑌3 ∗ 218 + 𝑌4 ∗ 300 + 𝑌5 ∗ 300

Constraints:

Given: Cash outflow every year should not be more than $2 billion

Therefore, 𝑌𝑖 ∗ 𝐶𝐹𝑖,𝑗 ≥ −2000

The cash flow (CFi,j) is in millions.

b)

If we do not select Project 2 then we cannot select project 3 too because in Year 1, without the cash
inflow that comes from project 2 the annual expenditure would cross the limit of $2 billion. Dropping
Project 3 also means an extra $168 million loss in final NPV. We cannot balance out the exclusion of
project 2 with project 4 because project 4 has a very huge Year 0 investment which means we can only
select either Project 3 or Project 5 with Project 4 which would lead to huge decrease in total NPV.
Hence, to maximize our NPV, we need Project 2 in the mix.

Q2)

Decision Variable:

𝐵𝑖 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑏𝑜𝑥𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑, 𝑤ℎ𝑒𝑟𝑒 𝑖 = (1,2,3,4,5,6,7)

𝐵𝑖 𝑤𝑜𝑢𝑙𝑑 𝑜𝑛𝑙𝑦 𝑡𝑎𝑘𝑒 𝑖𝑛𝑡𝑒𝑔𝑒𝑟 𝑣𝑎𝑙𝑢𝑒

 Ayush Ranjan (10231673)
Arushi Pandey (10231577)

1, 𝑖𝑓 𝑡ℎ𝑒 𝑏𝑜𝑥 𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝑌𝑖 = {
0, 𝑖𝑓 𝑡ℎ𝑒 𝑏𝑜𝑥 𝑖𝑠 𝑛𝑜𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Objective Function:

𝑀𝑖𝑛𝑖𝑚𝑖𝑧𝑒: 33 ∗ 𝐵1 + 30 ∗ 𝐵2 + 26 ∗ 𝐵3 + 24 ∗ 𝐵4 + 19 ∗ 𝐵5 + 18 ∗ 𝐵6 + 17 ∗ 𝐵7 + 1000 ∗ (𝑌1 + 𝑌2

+ 𝑌3 + 𝑌4 + 𝑌5 + 𝑌6 + 𝑌7 )

Constraints:

Non-negativity: 𝐵𝑖 ≥ 0

Lower Bound Constraints:

B1 ≥ 400
B1 + B2 ≥ 700
B1 + B2 + B3 ≥ 1200
B1 + B2 + B3 + B4 ≥ 1900
B1 + B2 + B3 + B4 + B5 ≥ 2100
B1 + B2 + B3 + B4 + B5 + B6 ≥ 2500
B1 + B2 + B3 + B4 + B5 + B6 + B7 ≥ 2700

Upper Bound Constraints:

𝐵1 ≤ 2700 ∗ 𝑌1

𝐵2 ≤ 2300 ∗ 𝑌2

𝐵3 ≤ 2000 ∗ 𝑌3

𝐵4 ≤ 1500 ∗ 𝑌4

𝐵5 ≤ 800 ∗ 𝑌5

𝐵6 ≤ 600 ∗ 𝑌6

𝐵7 ≤ 200 ∗ 𝑌7
 Ayush Ranjan (10231673)
Arushi Pandey (10231577)