Module19 - Making the Decision with Multiple Projects...

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Making the Decision with Multiple Projects Deterministic Evaluation Part I
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Key Concepts Last Module: Completed analysis of a single project This Module: Introduce multiple project analysis Learn how to establish portfolios of investment projects under deterministic analysis.
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Engineering Projects Revenue Projects : Investments which generate returns (positive cash flows). The goal here is to maximize present worth. Service Projects : Investments which do not generate returns (only a salvage value may be positive), but an investment must be made (i.e., a choice in technology is required). The goal here is to generally minimize present worth (of costs). Cannot analyze in the same manner due to cash flow profiles.
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Multiple Project Analysis If projects are independent, then they can be analyzed separately. But, we need to analyze projects simultaneously when: Numerous projects compete to solve a problem or take advantage of an opportunity. (Only choose 1.) Constraints, such as a budget limit, force one to choose between possible choices (they compete for funding). Accepting a project relies on another project being accepted. (A truly dependent project!)
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Mutually Exclusive Alternatives Once we define possible projects, we must define investment alternatives. These are “bundles” of engineering projects. They can be viewed as portfolios . Options must be mutually exclusive. Acceptance of one precludes others. “Do nothing” is a feasible option (often). Constraints may reduce options. Capital budgets, for example.
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Example Mexican satellite services provider SatMex announced that it has lost at least one year of operating capacity from its most recently launched satellite, Satmex 5, after the primary propulsion system failed. Replacement alternatives were ource: Iliff, L., “Mexico's Satmex: Propulsion System Failure To Cut Satellite Life,” Dow Jones Business News , January 29, 2010.
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Example Continued Assume the following three options are available: Purchase and launch new satellite Investment of $200M, 3 year life, Purchase satellite in orbit from competitor Investment of $175M, 3 year life, Lease satellite in orbit from competitor 3 year contract, $100M per year, no SV
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Investment Portfolios Portfolio Launch Purchase Lease 1 0 0 0 2 1 0 0 3 0 1 0 4 0 0 1 5 1 1 0 6 0 1 1 7 1 0 1 8 1 1 1 (Do nothing)
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Feasible Portfolios Constraint: At most 2 satellites. Portfolio Launch Purchase Lease 1 0 0 0 2 1 0 0 3 0 1 0 4 0 0 1 5 1 1 0 6 0 1 1 7 1 0 1 8 1 1 1 Infeasible
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Feasible Portfolios Constraint: $200M time zero budget. Portfolio Launch Purchase Lease 1 0 0 0 2 1 0 0 3 0 1 0 4 0 0 1 5 1 1 0 6 0 1 1 7 1 0 1 8 1 1 1 Infeasible Infeasible
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Constraint: Maximum of one satellite. Portfolio
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This note was uploaded on 01/11/2012 for the course EIN 4354 taught by Professor Tufecki during the Fall '08 term at University of Florida.

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Module19 - Making the Decision with Multiple Projects...

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