Module21 - Making the Decision with Multiple Projects...

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Making the Decision with Multiple Projects Deterministic Evaluation with Large-Scale Issues Part I
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Key Concepts Last Module: Unequal Lives Analysis This Module: Large-Scale Issues What happens when we have a lot of projects to evaluate?
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Large Scale Issues Analyzing revenue projects is not trivial: Defining of Mutually Exclusive Portfolios can lead to an extreme number of alternatives: Up to 2k portfolios with k projects If k =3, portfolios = 8 If k =10, portfolios = 1024 If k = 20, portfolios = 1048576 Total or Incremental Analysis would be difficult.
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Large Scale Issues We have an exponential number of portfolios to analyze when enumerating all possibilities. Two approaches allow for the analysis of individual projects (not portfolios) Linear (integer) programming (IP) Heuristic ranking procedures IP defines an optimal portfolio, requires some modeling knowledge. Ranking procedures easy, but may not provide best solution.
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Linear Integer Programming Linear programming is a mathematical modeling technique for solving complex decision problems. A model consists of: Decision variables. In our context: which projects to accept or reject. Objective function. In our context: maximizing the present worth of the portfolio of projects selected. Constraints. In our context: meeting budgets or independence conditions
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Decision Variables Define our decisions according to the binary variables:
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