SOLUTIONS TO PROBLEMS FROM HW SET 3

1)

i) NPV1 (Capital _ Performance) = t =0 { Ft + S t * (1 t m ) + DEPt * t m }(1 + i )

4 t

F0 = $3,000,000 _ F1 , F2 , F3 = 0

S 0 , S1 , S 2 , S3 = 0; S 4 = $500,000 ; (1-tm) = 0.68.

DEP0 = 0 ; DEP1 = $3m * 0.3333 = $999,900 ; DEP2 = $3m * 0.4445 = $1,333,500

DEP3 = $3m * 0.1481 = $444,300 ; DEP4 = $3m * 0.0741 = $222,300

NPV1 = 3,000,000 + 999,900 (0.32) (1.1)-1 + 1,333,500 (0.32) (1.1)-2 +

444,300 (0.32) (1.1)-3 + 222,300 (0.32) (1.1)-4 + 500,000*0.68 (1.1)-4
= - $ 1,968,800. (assuming that salvage value is taxed at the same rate as the
revenues.

ii) NPV2 (Pr oduction Performance) = t =0 {(1 t m )(R t E t ) OC t }(1 + i )

4 t

OC t = 0.0 for all t

R t = $1,500,000 for all t (1 t m ) = (1 0.32) = 0.68 ; E t = $500,000 for all t

NPV2 = (0.68)(1,500,000 500,000)(P / A,10%,4)

680,000[(1.1) 4 1]
= = $2,155,500. .
(0.1)(1.1) 4

iii) NPV = NPV1 + NPV2 = 1,968,800 + 2,155,500 = $186,700.

 NPV2 = t =1 {(1 t m )(R t E t )}(1 + i )
4 t
2) a)

OC t = 0.0 for all t

R t = $1,000,000 for all t >0. (1 t m ) = (1 0.35) = 0.65

E t = $500,000 for all t >0. MARR = 10%

NPV2 = (0.65)(1,000,000 500,000)(P / A,10%,4)

325,000[(1.1) 4 1]
= ; = 325,000 * (3.1699) = $1,030,200
(0.1)(1.1) 4

NPV1 = t =0 { Ft + S t + DEPt * t m }(1 + i )

4 t
b)
S t = 0 for all t

NPV1 = F0 + F0 * 0.3333 * (0.35) * (1.1)-1 + F0 * 0.4445 * (0.35) * (1.1)-2 +

F0 * 0.1481 * (0.35) * (1.1)-3 + F0 * 0.0741 * (0.35) * (1.1)-4 = - 0.7087 F0

The project is attractive when the NPV 0

Hence, NPV1 + NPV2 0
0.7087 F0 + 1,030,200 0
0.7087 F0 1,030,200
1,030,200
F0
0.7087
F0 $1,453,600

3)

Decision Variables

Q1 = Pr od n Qty. of product in period 1

I t = Inventory Qty of product at the end of period t = 0,1

B t = Backorder Qty of product at the end of period t = 0,1

M i ,1 = Budget allocated for category i in period 1, i =1,2,3,4.

Obj. Function

Max Z = NPV2

= {(1 .3)[P(I 0 + Q1 I1 ) (CQ 1 + hI1 + bB1 )] WQ1 }(1 + i )

1

{C=1.5+.5=2.0, W=.5}

= {(.7 )[10(I 0 + Q1 I1 ) (2Q1 + I1 + 3B1 )] .5Q1 }(1.1)

1

= {7 I 0 + 5.1Q1 7.7 I1 2.1B1 }(1.1)

1

{ I0 = 0 }

= 4.636Q1 7 I1 1.909B1

Constraints

I. Resource Constraints

i) Set-up Cost: .5Q1 M 1,1 0

ii) Labor Cost: 1.5Q1 M 2,1 0

iii) Idle Cost: .5Q1 M 3,1 0

iv) Inventory Cost: I1 + 3B1 M 4,1 0

II. Budget Constraint: M 1,1 + M 2,1 + M 3,1 + M 4,1 10,000

III. Demand Constraints

I 0 B 0 + Q1 I1 + B1 = D1

Q1 I1 + B1 = 2000

{ I 0 = B0 = 0 }

Q1 , I1 , B1 0 and M i ,1 0 for all i.

4)

Dec n Variables

Q t = Pr od n Qty. of product in period t, t=1,2

I t = Inventory Qty of product at the end of period t, t = 0, 1,2

B t = Backorder Qty of product at the end of period t, t = 0,1,2

M i , t = Budget allocated for category i in period t; t =1,2; i =1,2,3,4.

Obj. Function

Max Z = NPV2

2
= {(1 .3)[P(I t 1 + Q t I t ) (CQ t + hI t + bB t )] WQ t }(1 + i ) t
t =1

{C=1.5+.5=2.0, W=.5}

2
= {(.7 )[10(I t 1 + Q t I t ) (2Q t + I t + 3B t )] .5Q t }(1.1)t
t =1

= {(.7 )[10(I 0 + Q1 I1 ) (2Q1 + I1 + 3B1 )] .5Q1 }(1.1)

1

+ {(.7 )[10(I1 + Q 2 I 2 ) (2Q 2 + I 2 + 3B 2 )] .5Q 2 }(1.1)

2

= 4.636Q1 7 I1 1.909B1 + 4.215Q 2 + 5.785I1 6.364I 2 1.736B 2

= 1.215I1 1.909B1 + 4.636Q1 + 4.215Q 2 + 5.785I1 6.364I 2 1.736B 2

Constraints

I. Resource Constraints

i) Set-up Cost: .5Q1 M 1,1 0

.5Q 2 M 1, 2 0
 ii) Labor Cost: 1.5Q1 M 2,1 0

1.5Q 2 M 2, 2 0

iii) Idle Cost: .5Q1 M 3,1 0

.5Q 2 M 3, 2 0

iv) Inventory Cost: I1 + 3B1 M 4,1 0

I 2 + 3B 2 M 4, 2 0

II. Budget Constraint: M 1,1 + M 2,1 + M 3,1 + M 4,1 10,000

M 1, 2 + M 2, 2 + M 3, 2 + M 4, 2 10,000

III. Demand Constraints

I 0 B 0 + Q1 I1 + B1 = D1

Q1 I1 + B1 = 2000 => t=1

{ I 0 = B0 = 0 }

I1 B1 + Q 2 I 2 + B 2 = 2500 => t=2

Q t , I t , B t 0 for t=1,2

and M i , t 0 for i =1,2,3,4: t =1,2

5) Incremental Value Method for computing average WIP:

(20)(1.5) + (20 + 15)(2) + (20 + 15 + 25)(1.6) + (20 + 15 + 25 + 40)(2.5) + (20 + 15 + 25 + 40 + 35)(.5)

WIP =
(1.5 + 2.0 + 1.6 + 2.5 + .5)

30 + 70 + 96 + 250 + 67.5
WIP =
8.1
WIP = $63.40/ unit

6) a) Incremental Value Method:

 (10)(168) + (10 + 15)(48) + (10 + 15 + 20)(40) + (10 + 15 + 20 + 20)(5)
WIP =
(168 + 48 + 40 + 5)

1680 + 1200 + 1800 + 325

WIP =
261
WIP = $19.18/ unit.
(10)(168) + (10 + 15)( t 1 ) + (10 + 15 + 20)(40) + (10 + 15 + 20 + 20)(5)
b) WIP =
(168 + t 1 + 40 + 5)

(3805 + 25t 1 )
WIP =
(213 + t 1 )

WIP 25 1 25 (3805 + 25t 1 )

= + (3805 + 25t 1 ) =
2
2

t 1 (213 + t 1 ) (213 + t 1 ) (213 + t 1 ) (213 + t 1 )

WIP 25 (3805 + 25 * 48)

At t 1 = 48, = = $0.02 / hr / unit
t 1 (213 + 48) (213 + 48) 2