MAN 305 Operations Research II

Capital Budgeting Problem

In his position as vice president of research and development (R&D) for CRT Technologies, Mark
Schwartz is responsible for evaluating and choosing which R&D projects to support.

The company received 18 R&D proposals from its scientists and engineers, and identified six projects
as being consistent with the company’s mission. However, the company does not have the funds
available to undertake all six projects. Mark must determine which of the projects to select.

The funding requirements for each project are summarized in the following table along with the NPV
the company expects each project to generate.

Capital (in $1000s) Required in

Project Expected NPV (in $1000s) Year 1 Year 2 Year 3 Year 4 Year 5
1 $141 $75 $25 $20 $15 $10
2 $187 $90 $35 $0 $0 $30
3 $121 $60 $15 $15 $15 $15
4 $83 $30 $20 $10 $5 $5
5 $265 $100 $25 $20 $20 $20
6 $127 $50 $20 $10 $30 $40

The company currently has $250,000 available to invest in new projects. It has budgeted $75,000 for
continued support for these projects in year 2 and $50,000 per year for years 3, 4, and 5. Surplus funds
in any year are appropriated again for other uses within the company and may not be carried over to
future years.

The company also has these preferences for selection of the projects:

• Of projects 1, 5 & 6, no more than one may be selected

• Of projects 1, 3 & 6, exactly one must be selected
• Project 4 cannot be selected unless project 5 is also selected

Formulate and solve an Integer Programming problem to aid Mark Schwartz to select the project
that will yield the maximum expected NPV.

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MAN 305 Operations Research II

Mathematical Model

Decision Variables

ì1, if project i is selected

X =í i = 1, 2,...,6
i î 0, otherwise

Objective Function

Maximize the total NPV of the selected projects:

𝑀𝑎𝑥 141𝑥' + 187𝑥+ + 121𝑥- + 83𝑥/ + 265𝑥2 + 127𝑥3

Constraints:

Capital Constraints

Year 1: 75𝑥' + 90𝑥+ + 60𝑥- + 30𝑥/ + 100𝑥2 + 50𝑥3 ≤ 250

Year 2: 25𝑥' + 35𝑥+ + 15𝑥- + 20𝑥/ + 25𝑥2 + 20𝑥3 ≤ 75
Year 3: 20𝑥' + 0𝑥+ + 15𝑥- + 10𝑥/ + 20𝑥2 + 10𝑥3 ≤ 50
Year 4: 15𝑥' + 0𝑥+ + 15𝑥- + 5𝑥/ + 20𝑥2 + 30𝑥3 ≤ 50
Year 5: 10𝑥' + 30𝑥+ + 15𝑥- + 5𝑥/ + 20𝑥2 + 40𝑥3 ≤ 50

Binary variables

𝐴𝑙𝑙 𝑥9 𝑚𝑢𝑠𝑡 𝑏𝑒 𝑏𝑖𝑛𝑎𝑟𝑦

Binary Variables & Logical Conditions

Ø Of projects 1, 5 & 6, no more than one may be selected:

𝑥' + 𝑥2 + 𝑥3 ≤ 1

Ø Of projects 1, 3 & 6, exactly one must be selected:

𝑥' + 𝑥- + 𝑥3 = 1

Ø Project 4 cannot be selected unless project 5 is also selected:

𝑥/ − 𝑥2 ≤ 0