1. A company must select among a series of new investment alternatives. The pote
ID: 2572896 • Letter: 1
Question
1. A company must select among a series of new investment alternatives. The potential investment alternatives, the net present value of the future stream of returns, the capital requirements, and the available capital funds over the next three years are given below: Net Present Capital Requirements (S) Alternative Value (S) Year1 Year 2 Year 3 32,850 30,500 12,600 36,500 58,700 41,200 45,400 45,00028,600 13,500 11,200 53,400 15,000 44,400 14,000 6,500 10,900 Test market new product 90,400 Research &Development; 84,000 35,000 Purchase new equipment Capital funds available 120,000 66,500 99,800 wants to select at least 3 alternatives. In addition, the company also wants to seledt The company at least two alternatives from the warehouse expansion, test market new product and purchase new equipment alternatives. Formulate a capital budgeting problem that will maximize total net present value by determining: (a) The decision variables. b) The objective function. What does it represent? (c) All the constraints. What does each constraint represent? Note: Do NOT solve the problem after formulating.Explanation / Answer
a)
The decision variables are:
b)
The objective function z is:
maximise NPV > CAPITAL REQUIREMENTS ( in the time period mentioned Yr1, Yr 2, Yr 3)
It represents the best postive NPV that could be obtained by considering the different alternatives then chooing the best of them
The best 3 are:
The best 2 of the mentioned are:
1. Purchase equipment
2. Warehouse expansion
c)
All the constraints:
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