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Dmu Hw3 - Sai & Surya

The document discusses two optimization problems - a capital budgeting problem involving selecting a portfolio of projects with the highest net present value subject to annual capital budget constraints, and a production planning problem involving determining the optimal quantities of different box types to produce to meet demand at minimum total cost which includes fixed and variable costs.

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Vivek Jani
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22 views2 pages

Dmu Hw3 - Sai & Surya

The document discusses two optimization problems - a capital budgeting problem involving selecting a portfolio of projects with the highest net present value subject to annual capital budget constraints, and a production planning problem involving determining the optimal quantities of different box types to produce to meet demand at minimum total cost which includes fixed and variable costs.

Uploaded by

Vivek Jani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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31-08-2021

Sai (10233233) & Surya (10233953)

Decision Models and Uncertainty Homework #3

1.

Project 1 2 3 4 5
Year 0 (900) (50) (700) (1200) (300)
Year 1 (800) 500 (400) 350 (950)
Year 2 500 (500) 350 390 700
Year 3 600 90 490 580 600
Year 4 720 (160) 450 620 500
Year 5 840 - 510 - 150
NPV @ 10% 250 -50 218 300 300
a.
Decision variables:
Yi = 1 if ith project is selected and 0 if ith project is not selected

Objective function: Considering +ve cash flows as contributions and -ve cash flows
as distributions

Maximize NPV
= Maximize 250*Y1 – 50*Y2 + 218*Y3 + 300*Y4 + 300*Y5

Annual Capital Budget Constraint (in million $):


900*Y1 + 50*Y2 + 700*Y3 + 1200*Y4 + 300*Y5 <= 2000
800*Y1 - 500*Y2 + 400*Y3 - 350*Y4 + 950*Y5 <= 2000
-500*Y1 + 500*Y2 - 350*Y3 - 390*Y4 - 700*Y5 <= 2000
-600*Y1 - 90*Y2 - 490*Y3 - 580*Y4 - 600*Y5 <= 2000
-720*Y1 + 160*Y2 - 450*Y3 - 620*Y4 - 500*Y5 <= 2000
-840*Y1 + 0*Y2 - 510*Y3 + 0*Y4 - 150*Y5 <= 2000

Binary Constraint:
Yi should be integer (Either 0 or 1)
Yi >= 0

b. Simple Heuristic Solution: Company will try to select all projects with positive NPV
values – So ideally if there is no lack of funds, it should invest in projects 1,3,4,5

However, since there is a $2B annual cap on the net cash flows, in year 0 project 4
cannot be selected since including it in the list of projects will violate the annual net
cash flows constraint of $2B.

So projects 1,3,5 must be selected. Ideally there is no need to include project 2 since
it brings down the total NPV by $50 MM. However, in year 1, the net cash flows of
projects 1,3,5 are -$2150MM (violating the annual net cashflows constraints). To
satisfy this constraint, the solver must have included project 2 to ensure that the net
cash flows don’t exceed $2B (cash flow constraint for year 1)
Q2.) The Box Problem:

Let Xi be the quantity of box type i to be produced. i = 1,2,3,4,5,6,7. (decision variables)

Also define Yi as binary variables as follows:

Yi = 1 if Xi > 0 and 0 if Xi = 0

Constraints:

Non negativity and integrality: All Xi are non-negative integers (i = 1,2,3,4,5,6,7) i.e., X i >= 0 and
integer.

Demand constraints

X1 >= 400

X1 + X2 >= 700

X1 + X2 + X3 >= 1200

X1 + X2 + X3 + X4 >= 1900

X1 + X2 + X3 + X4 + X5 >= 2100

X1 + X2 + X3 + X4 + X5 + X6 >= 2500

X1 + X2 + X3 + X4 + X5 + X6 + X7 >= 2700

Linking Xi and Yi

X1 <= 2700*Y1 (Since the max. demand for 1 is total demand; 400+300+500+700+200+400+200 =
2700)

Same explanation follows for max demands of boxes of type 2,3,4,5,6,7.

X2 <= 2300*Y2

X3 <= 2000*Y3

X4 <= 1500*Y4

X5 <= 800*Y5

X6 <= 600*Y6

X7 <= 200*Y7

Objective function: (Minimization)

Total cost = Fixed cost + Variable cost

Total cost ($) = 33*X1 + 30*X2 + 26*X3 + 24*X4 + 19*X5 + 18*X6 + 17*X7 + 1000 (Y1+Y2+Y3+Y4+Y5+Y6+Y7)

= Min(33*X1 + 30*X2 + 26*X3 + 24*X4 + 19*X5 + 18*X6 + 17*X7 + 1000 (Y1+Y2+Y3+Y4+Y5+Y6+Y7))

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