Question

Your employer is trying to select from a list of possible capital projects. The projects, along with their cost and benefits, are listed below. The capital budget available is $1 million. In addition to spending constraints, your employer would like to select at least 2 projects. Projects 2 and 4 cannot both be selected together. Formulate the problem as a linear program and determine the optimal solution.
Project Cost Net Present Value
1 $300,000 $720,000
2 $260,000 $780,000
3 $215,000 $690,000
4 $240,000 $700,000
5 $295,000 $510,000

1. Which projects should be selected?
a. Project 1 will
b. Project 2 will
c. Project 3 will
d. Project 4 will
e. Project 5 will

2. What is the total net present value of these projects?

Answer 1

Answer:

Project 1, 2 and 3 will be selected

Total NPV of these projects will be $2,190,000

Explanation:

Availability of capital = 1 million

Minimum 2 projects should be selected

Project 2 and 4 cannot be selected together.

Value of project =  NPV / Cost

P1 = 720,000 / 300,000 = 2.4

P2 = 780,000 / 260,000 = 3

P3 = 690,000 / 215,000 = 3.2

P4 = 700,000 / 240,000 = 2.9

P5 = 510,000 / 295,000 = 1.7