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Lecture19aa

# Lecture19aa - Lecture 1 LP Formulation Examples a Capital...

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Lecture 03/03/08 1. LP Formulation Examples a. Capital Budgeting Problem b. Use of Solver to Solve LPs c. Blending Problems

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Capital Budgeting Example Example 10, Page 80 in Text Star Oil is considering 5 investment opportunities. The cash outflows and NPV’s (in millions of dollars) are given in following table: Funds Inv.1 Inv.2 Inv.3 Inv.4 Inv.5 Avail Time 0 Cash Outflow \$11 \$53 \$5 \$5 \$29 \$40 Time 1 Cash Outflow \$3 \$6 \$5 \$1 \$34 \$20 NPV \$13 \$16 \$16 \$14 \$39 Star Oil wishes to find the fraction of each investment to purchase so that total NPV of investments 1-5 is maximized.
LP Formulation of Capital Budgeting Example Definition of variables Let x i = fraction of investment i that is purchased i=1,2,..,5 Constraints 11x 1 + 53x 2 + 5x 3 + 5x 4 + 29x 5 40 (Fund Availability for Time 0) 3x 1 + 6x 2 + 5x 3 + x 4 + 34x 5 20 (Fund Availability for Time 1) 0 x i 1 for i=1,2,…5 since x i is a fraction. Objective Function Maximize 13x 1 + 16x 2 + 16x 3 + 14x 4 + 39x 5

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Use of Spreadsheets to Solve LP Problems Solving LP problems graphically is only
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