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Exercise 1 Investment company is considering 6 investments. The cash required fo

ID: 2815222 • Letter: E

Question

Exercise 1 Investment company is considering 6 investments. The cash required for each investment as well as the net present value (NPV) of the investment is given in the table. The cash available for the investments is $14,000. The company wants to maximize its total NPV. What is the optimal strategy? An investment can be selected or not. One cannot select a fraction of an investment. Investment 1 Cash required ($1000s) NPV added 16 ($1000s) 12 19 a) Formulate a binary program to find the optimal selection of investments. Now some more conditions are added from the owners of the company: 1. 2. 3. 4. Exactly 3 stocks are selected If stock 2 is selected, then so is stock 1 If stock 1 is selected, then stock 3 is not selected. Either stock 4 is selected or stock 5 is selected, but not both. b) Modify the model to take the new conditions into account.

Explanation / Answer

Solution of A

Investment No Investment Amt NPV

1 6 & 4 5+6+4 =14 16+19+8 = 43

2 3 & 4 7+4+3 = 14 22+12+8 = 42

2 4 & 5 7+3+4 = 14 22+8+11 = 41

3 5 & 6 4+4+6 = 14 12+11+19 = 42

Investment 1 6 & 4 to be selected as it provide highest NPV of 43 among others.

Solution of B

3 5 & 6 4+4+6 = 14 12+11+19 = 42

Above combination fulfill all the condition and providing NPV of 42.