Assignment I to be done in a group of 4 members MBA

1. Let’s say XYZ cpny is considering investing in several projects that have varying capital
requirements over the next four years. Faced with limited capital each year, management
would like to select the most profitable projects. The estimated net present value for each
project, the capital requirements, and the available capital over the four-year period are
shown in Table below.

Plant Warehouse New New Product Total Capital

Project
Expansion Expansion Machinery Research Available

Present Value $90,000 $40,000 $10,000 $37,000  

Year 1 Cap Rqmt $15,000 $10,000 $10,000 $15,000 $40,000

Year 2 Cap Rqmt $20,000 $15,000 - $10,000 $50,000

Year 3 Cap Rqmt $20,000 $20,000 - $10,000 $40,000

Year 4 Cap Rqmt $15,000 $5,000 $4,000 $10,000 $35,000

a. Formulate the problem as LP.

b. If these projects are mutually exclusive and the organization has no sufficient fund to finance
all projects simultaneously, which project(s) should be selected to maximize the present value?

2. The manager of a department store in Adama has decided to prepare a promotion campaign on
project basis to decide on the types and amounts of advertising the store should use. He has
invited representatives from the local radio station, television station, and newspaper to make
presentations in which they describe their audiences.

a. The television station representative indicates that a TV commercial, which costs Birr 15,000,
would reach 25,000 potential customers. The break down of the audience is as follows.

Male Female

Old 5,000 5,000

Young 5,000 10,000

b. The news paper representative claims to be able to provide an audience of 10,000 potential
customers at a cost of Birr 4000 per ad. The break down of the audience is as follows.

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 Male Female

Old 4,000 3,000

Young 2,000 1,000

c. The radio station representative says that the audience for one of the station’s commercials,
which costs Birr 6000, is 15,000 customers. The break down of the audience is as follows.

Male Female

Old 1,500 1,500

Young 4,500 7,500

The store has the following advertising policy:

a. Use at least twice as many radio commercials as news paper ads.

b. Reach at least 100,000 customers
c. Reach at least twice as many young people as old people
d. Make sure that at least 30% of the audience is women.
Available space limits the number newspaper ads to 7. The store wants to know the optimal
number of each type of advertising to purchase to minimize total cost.

Required:

a. Formulate appropriate linear programming model.

b. Standardize the model
c. Develop initial simplex table
d. Solve the problem using Excel solver
3. In Southern Region there are a group of three Zones (communal farming communities).
Overall planning for this group is done in its Coordinating Technical Office. This office
currently is planning agricultural production for the coming year. The agricultural output of
each zone is limited by both the amount of available irrigable land and the quantity of water
allocated for irrigation by the Water Commissioner (a national government official). These
data are given in the following table.

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 TABLE 1 Resource data for the Southern Confederation of the Three Zones

Zone Usable Land (Acres) Water Allocation (Acre Feet)

1 400 600

2 600 800

3 300 375

The crops suited for this region include sugar beets, cotton, and sorghum, and these are the three
being considered for the upcoming season. These crops differ primarily in their expected net
return per acre and their consumption of water. In addition, the Ministry of Agriculture has set a
maximum quota for the total acreage that can be devoted to each of these crops by the Southern
Region of Three Zones, as shown in Table 2 below.

TABLE 2. Crop data for the Southern region of Three Zones

Crop Maximum Quota Water Consumption Net Return

(Acres)
(Acre Feet/Acre) ($/Acre)

Sugar beets 600 3 1,000

Cotton 500 2 750

Sorghum 325 1 250

Because of the limited water available for irrigation, the Southern region of three zones will not
be able to use all its irrigable land for planting crops in the upcoming season. To ensure equity
between the three zones, it has been agreed that every zone will plant the same proportion of its
available irrigable land. For example, if zone 1 plants 200 of its available 400 acres, then zone 2
must plant 300 of its 600 acres, while zone 3 plants 150 acres of its 300 acres. However, any
combination of the crops may be grown at any of the zones. The job facing the Coordinating
Technical Office is to plan how many acres to devote to each crop at the respective zone while
satisfying the given restrictions. The objective is to maximize the total net return to the Southern
region of three zones as a whole.

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 a. Develop the problem as LP
b. Standardize the model
c. Solve the problem using excel solver
4. Using graphic approach(Extreme Corner point),
i. Find the optimal solution for (a) below
ii. If there exist multiple solution for (b) below taking the same constraints,
determine at least 4 integer multiple solutions.
ZMin a) 1500x+2400y

b) 1600x+2400y

Subjected to:

4x+Y>24

2x+3y>42

X+4y>36

X<14

y<14

x, y>0

5. Innis consulting group Investments manages funds for a number of companies and wealthy
clients. The investment strategy is tailored to each client’s needs. For a new client, Innis has been
authorized to invest up to $1.2 million in two investment funds: a stock fund and a money market
fund. Each unit of the stock fund costs $50 and provides an annual rate of return of $5 per dollar
invested ; each unit of the money market fund costs $100 and provides an annual rate of return of
$4 for each dollar invested . The client wants to minimize risk subject to the requirement that the
annual income from the investment be at least $60,000. According to Innis’s risk measurement
system, each unit invested in the stock fund has a risk index of 8, and each unit invested in the
money market fund has a risk index of 3; the higher risk index associated with the stock fund
simply indicates that it is the riskier investment. Innis’s client also specified that at least $3000
be invested in the money market fund.
a. Determine how many units of each fund Innis should purchase for the client to minimize the
total risk index for the portfolio.

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b. How much annual income will this investment strategy generate?
c. Suppose the client desires to maximize annual return. How should the funds be invested?
d. What is the optimal solution, and what is the minimum total risk?
e. Specify the objective coefficient ranges.
f. How much annual income will be earned by the portfolio?
g. What is the rate of return for the portfolio?
h. What is the dual value for the funds available constraint?
i. What is the marginal rate of return on extra funds added to the portfolio?
j. Suppose the risk index for the stock fund (the value of CS) increases from its current value of 8
to 12. How does the optimal solution change, if at all?. Suppose the risk index for the money
market fund (the
value of CM) increases from its current value of 3 to 3.5. How does the optimal solution change,
if at all?
l. Suppose CS increases to 12 and CM increases to 3.5. How does the optimal solution change, if
at all?
Step 1
Let A denote the counts of items bought in SF and B denote the counts of items bought in MMF.
Make an objective function to minimize the total danger
Frame the inequality constraints .
The first constraints is the available collection, the second constraint is the yearly wage from the
expenditure, and the third constraint is the MMF minimum cost and the non negativity
constraints.
Min. 8A + 3B
50A + 100B <= 1,200,000
5A + 4B >= 60,000
B >= 3,000
A, B >=0
Step 2
The above constraint has the inequality (<) , (>) sign. The point (0,0) which satisfies this
constraint lie below the line and above the line. As a result, the feasible solution includes all the
points on the line, below it, and above it.
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The coordinate that satisfies constraint
B = 3000 is (0, 3000).
Obtain 2 points that satisfies the equation, 50A + 100B = 1,200,000 by substituting
A= 0 and B= 0 in it
A=0,
50A x 0 + 100B = 1,200,000
100B = 1,200,000
B= 12,000
B=0
50A + 100x 0 = 1,200,000
50A = 1,200,000
A = 24,000
Therefore (0 , 12,000) , (24,000, 0)
Step 3
Obtain 2 points that satisfies the equation 50A + 4B = 60,000 by substituting A = 0 and B = 0 in
it
For A = 0
5 x 0 + 4B = 60,000
4B = 60,000
B= 15,000
For B = 0,
5A + 4 x 0 = 60,000
A = 12,000
Therefore (12,000, 0), (0, 15,000)
Step 4 Calculate the point of intersection
The required intersect equations are:
5A + 4B = 60,000
B = 3,000

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Calculate the point by substituting the obtained B value in the equation, 5A + 4B = 60,000 to get
the corresponding A value which will give the point
5A + (4 x 3,000) = 60,000
5A = 60,000 – 12,000
A = 48,000
5
= 9,600
Step 5
Calculate the point of intersection
The required intersect equations are
50A + 100B = 1,200,000
B = 3,000
Calculate the point by substituting the obtained B value in the equation, 50A + 100B = 1,200,000
To get the corresponding A value which will get
50A + (100 x 3,000) = 1,200,000
50A = 1,200,000 – 300,000
A= 900,000
50
= 18,000
Step 6
Calculate the point of intersection
The required intersect equations are
50A + 100B = 1,200,000
5A + 4B = 60,000
Calculate the point by multiplying equation, 50A + 4B = 60,000 with -10, adding

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) Please refer to the following calculation snapshots:

The decision variables (cells highlighted in Orange color) are the number of units invested in
Stock Fund and Money Market Fund

The objective function (cells highlighted in Yellow color) is to minimize the Total Risk
Total Risk = 8* number of units invested in Stock Fund + 3 * number of units invested in Money
Market Fund

The Constraints are:

i) Total amount invested should be less than or equal to the total fund available
ii) Total return generated should be more than or equal to the total income required
iii) Amount invested in money market fund should be more than or equal to $300,000

Optimal Solution:

Optimal Solution:
Stock Fund = 4000 units
Money Market Fund = 10000 units

Optimal Total Risk = 62000

B) The investment strategy generates $60,000

C) Please refer to the following calculation snapshots:

The decision variables (cells highlighted in Orange color) are the number of units invested in
Stock Fund and Money Market Fund

The objective function (cells highlighted in Yellow color) is to maximize the Total Return
Total return = 10% * number of units invested in Stock Fund * 50 + 4% * number of units
invested in Money Market Fund * 100

The Constraints are:

i) Total amount invested should be less than or equal to the total fund available
ii) Total return generated should be more than or equal to the total income required
iii) Amount invested in money market fund should be more than or equal to $300,000
Optimal Solution:
Stock Fund = 18000 units
Money Market Fund = 3000 units

Optimal Total Return = $102,000

D) Optimal Solution:
Stock Fund = 18000 units
Money Market Fund = 3000 units

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Optimal Total Return = $102,000
Total Risk = 153000

E) Please refer to the following sensitivity report (This is for the initial solution, minimizing
the total risk):
Objective coefficient ranges are as follows:
Stock Fund units = (8 - 4.25) to Infinity = 3.75 to Infinity
Money Market Fund units = -Infinity to (3 + 3.4) = -Infinity to 6.4

F) Annual Income earned by the portfolio = $60,000

G) Rate of Return on the Portfolio = 60000 / 1200000 * 100 = 5%

H) Dual Value (or Shadow Price) for the funds available constraint is -0.056

I) Marginal Rate of return on extra funds added to the portfolio is Shadow price for return = 2.17

J) Allowable increase for the objective coefficient (risk index) for the stock fund is 1E+30 =
infinity. This means that the given optimal solution is valid for any value of increase in the risk
index of stock fund.
Hence, even if the risk index of stock fund increases from 8 to 12, the given optimal solution will
not change.

K) Allowable increase for the objective coefficient (risk index) for the money market fund is 3.4.
This means that the given optimal solution is valid for a value of up to 6.4 risk index of money
market fund.
Hence, if the risk index of money market fund increases from 3 to 3.5 will not change the given
optimal solution.

L) Because both the increases are well within the allowable increase range, the optimal solution
will not change. i.e. it will still remain 4000 units of stock fund and 10000 units of money market
fund.
(Note: The objective function will change as the risk index or coefficient has changed, but the
decision variable values remain unchanged.)