HOME WORK SET 2

1) An investor is considering the following investment options, which are not mutually
exclusive. The cash flows are as follows:
Projects

t 1 2 3 4 5 6
-
0 - 10000 15000 -20000 -30000 -40000 -35000
1 -5000 -10000 -12000 -15000 5000 0
2 -1000 0 5000 10000 10000 10000
3 6000 10000 12000 15000 20000 15000
4-6 6000 11000 13000 17000 20000 15000
7-8 0 11000 13000 15000 0 15000
Because of other commitments, the investor faces the following budget constraints: t

Maximum Capital Available

0 97500
1 29000

Assume that the investor does not have any lending or borrowing opportunities. Using
maximization of the sum of NPV's of the projects selected as the objective function,
formulate this as a Linear Programming problem with and without fractional funding.
Use an MARR of 20 %.

2) In problem 1), assume that fractional funding is not allowed and include the following
additional constraints.

(i) Only one of the projects in the set consisting of 1 , 2, and 3 can be
selected.
(ii) Project 2 cannot be selected unless project 4 can also be selected.

3) Formulate a Linear Programming model for selecting among three projects described
below, using maximizing the sum of NPV's of the projects selected as the objective
function. MARK = 8 %. There is a budget constraint of $ 13000 at time 0, and the
projects are required to generate $ 3500 at t = 1 and $ 1200 at t = 2. The life of each
project is 5 years. The projects are independent except that C cannot be selected unless A is
also selected. What is the value of extra budget money at t = 2 ?

Project Investment Annual cash flow,

A $ 5000 $ 1319
B $ 7000 $ 1942
C $ 8500 $ 2300
4) Formulate a Linear Programming model for selecting among three projects described
below, using maximizing the sum of NPV's of the projects selected as the objective
function. MARR = 15 %. There is a budget constraint of $ 16000 at time 0, and the
projects are required to generate $ 4000 at t = 1 and $ 1300 at t = 2. The life of each
project is 10 years. The projects are independent except that A cannot be selected unless B
is also selected. What is the value of extra budget money at t = 2 ?

Project Investment Annual cash flow

A $ 8000 $ 1900
B $ 5000 $ 1400
C $ 10000 $ 2500

5) An investor is considering four projects for possible investment. The cash flows and
the capital limits are as follows:

Projects
t 1 2 3 4 Capital
0 -1000 -2000 -1000 -3000 5000
1 -500 -1000 -800 -1000 4000
2 4000 5000 4000 6000

NPV at 1592 930 1344 681

15 %

The objective is to maximize the sum of NPV's of the projects selected. Fractional
funding is allowed. Lending and borrowing are not allowed.

(i) Set up the primal problem.

(ii) The optimal solution is as follows:
Project 1: 100 % ; Project 2: 100 %; Project 3: 100 % and Project 4 : 33 %
funding. Surplus capital at t=0 and t =1 are respectively 0 and 1370.

Set up the dual problem. Find the optimal solution of all dual
variables.