1 OR Chapter 19 Solutions SECTION 19.1 1, Assign 91(6) = 2 gallons to store 1. Then assign g2(6-2) = 2 gallons to Store 2, Finally assign g3(4-2) = 2 gallons to Store 3. 2, Let fe(d) be the maximum expected NPV earned from investments t,...3 given that d million dollars are available for investment in investments t,...3. Also define x,(d) = Amount of money (in millions) that should be assigned to investment t in order to attain fe(d). Finally, define ry(x) to be the expected NPV(in millions) obtained from investment t if x million dollars are invested in Investment t. Then £3(d) = r3(d) x3(d) = d and for t<2 fe(d) = max (re(x) + fea (d-x)} x where x is a member of {0,1,...d). We begin by computing the re(x). r1(0) = 0 ri(1) xi (2) xi (3) ri (4) x2 (0) eeet ra(1) ¥2(2) r2(3) ra(4) r3(0) xa(1) x3(2) 13(3) r3(4) Then £3(4) = f£3(3) £3(2) f3(1) £3(0) f2(4) = max 22 = 6.7 Ta £2(3) = max 7.8% x2(3) = 2 6.2 = 5.4% x2(2) = 0 f2(2) = max = 5.1 4.4 0 + £3(1) = 3.4* x2(1) = 0 (1) = max 7+ £3(0) = 1.7 £2(0) = 0 + £3(0) = 0 x2(0) = 0 O + £2(4) = 9.8 2.9 + f2(3) = 10.7 (4) = max 5.4 + £2(2) = 10.8* 6.9 + f2(1) = 10.3 x1 (4) = 2 9 + £2(0) = 9 Assign x,(4) = 2 million to Investment 1,x,(4 - 2) = 0 million dollars to Investment 2 and x3(2 - 0) = 2 million dollars to Investment 3. A total expected NPV of 10.8 million dollars will be obtained. SECTION 19.2 1, During Month 1 produce x:(1) = 3 units, During Month 2 produce x2(1 + 3 - 1) = 0 units. During Month 3 produce x3(3 - 2) = 1 unit. Now f£3(3) = 0, 1(3) = 0, £3(2) = 0, x2(2) = 0, f2(1) = 5, x3(1) = 1 £3(0) = 7, x3(0) = 2 #34 1/2(£5(2) + £2(1)) = 5.5* (x = 0) x2(3) = 0 min £2(3) = #5 + 1/2(f3(3) + £3(2)} = 10 (x = 1) O + 1 + 1/2{£3(0) + £3(1)} = 7* (x = 0) x2(2) = 0 f2(2) 5 43 + 1/2{f3(1) + £5(2)} = 10.5 (x = 1) 7 +5 + 1/2{f3(2) + £53(3)} = 12 ( x = 2) 5 + 1 + 1/2{£3(1) + £3(0)} = 12* (x = 1) x2(1) = 1 fa(1) = min 47 + 3 + 1/2{£3(2) + £3(1)} = 12.5 (x = 2) 9+ 5 + 1/2{f3(3) + £5(2)} = 14 (x = 3) 71+ 1 + 1/2{£3(1) + £5(0)) = 14* (x = 2) x2(0) = 2 £2(0) = min 49 + 3 + 1/2{f3(2) + f3(1)} = 14.5 (x = 3) 11 + 5 + 1/2{£3(3) + £3(2)} = 16 (x = 4) B+ 1 + 1/2{f2(1) + £2(0)} = 19 (x = 1) mi(1) = 21 f.(1) = min +7 + 3 + 1/2(£2(2) + f2(1)} = 19.5 (x = 2) 9 + 5 + 1/2{f2(3) + £3(2)} = 20.25 (x = 3) Thus x:(1) = 1, x2(1) =1, ¥2(0) = 2, x3(1) = 1, x3(0) = 2. After observing each period's demand, we may determine the optimal production level for the period. Minimum expected cost is $19.3. Let (i) = minimum expected cost incurred during periods t, t + 1, 3 given that inventory level at beginning of period t is i. | Then f3(i)= min {c(x) + 1/2((i + x= 1) + (i + x - 2) x 41/2(3(4 + x - 1) + Bd + x - 207 -1/2[2(4 + x - 1)" + 2(i + x -2)'1) where x must satisfy i + x - 1¢3 and O0 and c(0) = 0. 1/2[(i + x - 1)* + (i + x ~ 2)*) represents the expected holding cost during period 3 while 1/2(3(i + x - 1)” + 3(i + x - 2)"] represents the expected cost due to shortages during period 3. Then f2(i)= min (c(x) + 1/2((i + x - 1) + (i + x - 2)") x 41/2(3(4 + x - 1)° + 3(4 + x - 2)7] #1/2[f3(i + x - 1)" + £y(i + x -2)°)) where x must satisfy i + x - 1<3 and 00,c(s) = 500 + 5s. Then £3(x) = max {-c(s) - 1/2(2(x + s - 200)" + 2(x + s -400)*) 8 + 1/2[6(x + s - 200)* + 6(x + s -400)*] + 1/2[8min(x + s, 200) + 8min(x + s, 400)]} Here x' = max(x, 0) and s(the number of shirts ordered before game 3) must satisfy x + s - 200<400 or s<600 - x. For t = 1 and 2 fe(x) = max (-c(s) - 1/2[2(x + s = 200)* + 2(x + s -400)*] s + 1/2[8min(x + s, 200) + 8min(x + s, 400)] + 1/2fen(x + s - 200)" + 1/2fen(x + s - 400)*} Again s must satisfy s<600 - x. We list the computations in tabular form £3(0) Computations 8 Order Holding Salvage — Expected Total Profit Cost Cost value Sales Revenue 0 0 0 0 0 0 100 -1000 0 0 800 -200 200-1500 0 0 1600 100 300 -2000 -2(.5(100) 6(.5(100)) 8(.5(200) 200 +,5(0)) +.5(0)) +.5(300)) 400 -2500 -2(.5(200) 6(.5(200) — 8(.5 (200) 300* +.510)) #.8(0)) +,.5(400)) 500 -3000 -2(.5(300) 6(.5(300) — 8(.5 (200) 200 +.5(100)) — +.8(100)) —+.5(400)) 600 -3500 -2(.5(400) 6(.5(400) 8 (.5 (200) 100 +.5(200)} +,5(200)) — +.5(400))12 1(0) (Go for 1) f2(8) = max :4t* (Go for 2) t (Go for 1) max -4(1) = .4 (Go for 2) Hence if t<.4,f2(7) = .4 and go for 2 is optimal; if t>.4,f2(7) = t and going for i is optimal. We can now work backwards to determine f£2(7) (Go for 1) £1(14) = max 24f2(6) + .6f2(8) £2(7) +4-+ .24t (Go for 2) For t<.4,f2(7) = .4 so £,(14) equation reduces to (Go for 1) £,(14) = max 4 + .24t*(Go for 2) Thus for t<.4 £)(14) = .4 + .24t and after the first touchdown Army should try a 2 point conversion; if the 2 pt. conversion fails go for 2 pts. after the second touchdown; if the 2 pt. conversion succeeds go for a 1 pt. conversion after the second touchdown. If t>.4, we know that f2(7) = t. Then the f1(14) equation reduces to (Go for 1) £1(14) = max +4 + 2a (Go for 2) If t>.4 + .24t(or equivalently t>10/19) then £:(14) = t and after the first touchdown we should go for a one point conversion. This leads us to f2(7),80 we should then go for 1 point after the second touchdown. In short, if t>10/19 play for the tie! I£.4me where x_ is a member of (0,1,2,...w).13, Work backwards until f;(W) has been determined. 2. Let f:(d) be the maximum expected asset position of the firm at the end of year 10 given that at the beginning of year t the firm has d dollars in assets. Then fiold) = max (p EZ ay(d +i + y) + (I-p)d qyld-i + y)) i y ¥ where O100 and for t<99, 999 (1=Prooove-e) £e+1 (7) + Prooo0-r (fer (r + 1) (Accept Res.) fe(r) = max fen (x) (Reject Res.) We work backwards until fo(0) has been determined. From the fr(r) equation we can determine whether or not the airline should accept a customer's reservation at time t. 5. Let fe(R) be the maximum net profit earned during weeks t,...4 given that at the beginning of week t the machine is running. Similarly left