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Homework Set 2B

This document contains homework problems on capital budgeting and project selection. Problem 6 asks to maximize the total NPV of projects by allowing additional borrowing at year 1, with cash flows of $10,000, -$7,000, and -$7,000 over 3 years. Problem 7 formulates the project selection as a linear program to maximize end of horizon cash flows, allowing borrowing and lending at 20% interest for a single period. Problem 8 asks to formulate the dual problem to problem 7. Problem 9 formulates a multi-period project selection with a $2,000 budget at year 0, cash flow targets of $500 at years 1 and 2, and constraints on project selection

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72 views1 page

Homework Set 2B

This document contains homework problems on capital budgeting and project selection. Problem 6 asks to maximize the total NPV of projects by allowing additional borrowing at year 1, with cash flows of $10,000, -$7,000, and -$7,000 over 3 years. Problem 7 formulates the project selection as a linear program to maximize end of horizon cash flows, allowing borrowing and lending at 20% interest for a single period. Problem 8 asks to formulate the dual problem to problem 7. Problem 9 formulates a multi-period project selection with a $2,000 budget at year 0, cash flow targets of $500 at years 1 and 2, and constraints on project selection

Uploaded by

Nasr Cheaib
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© © All Rights Reserved
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Homework Set 2B

Continued from HW Set 2 (A)

6) Consider the six projects given in problem (1) of HW 2A. Assume that the investor has
the opportunity of borrowing additional funds at t = 1 only. The cash flows for this
borrowing opportunity are predetermined and as follows:

EOY Cash flow


1 10,000
2 - 7000
3 - 7000

Formulate this problem with the objective of maximizing the total NPV of the
projects selected. Assume that the projects can be fractionally funded. Use the same budget
constraints at t =0 and t = 1, given in the previous problem. MARR = 20 %.

7) Consider projects 1, 2, 3 , 4, 5 and 6 given in problem (1) of HW 2A. Do not include


the borrowing project described above. Assume that the investor can borrow and lend
money. These are single period activities; that is, the amount borrowed at t has to be paid
back at (t + 1) with interest. Similarly, any amount lent by the investor at t has to be
received back at ( t + 1) with interest. The horizon T = 1.

Formulate this problem as a linear programming problem with the objective of


maximizing the accumulated cash flows at the end of the horizon. Assume that the lending
and borrowing rates are the same as the MARR, which is 20 %. Assume also that the
projects can be partially funded.

8) Formulate the dual problem for the primal in (7) above.

9) Consider the following three projects, each with a life of 20 years.

Project Investment Annual Cash flow

A $ 1000 $ 240
B $ 800 $ 190
C $ 1500 $ 310

Assume that there is a budget constraint of $ 2000 at t = 0. The projects are


required to generate $ 500 at t = 1 and $ 500 at t = 2. Fractional funding is not allowed.
Project C cannot be selected unless A is also selected. The investor can borrow and lend
money at MARR, which is equal to 15 %. Assume that the horizon is t = 2, even though
there is budget constraint at t = 0 only.

Formulate this problem as a linear programming problem with the objective of


maximizing the accumulated cash flows at t = 2.

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