# Capital Budgeting

Chloe Schwasher, the vp of Finance for a major appliance manufacture, has before her 8 investment proposals submitted by various segments of the company for her approval or rejection. the table below summarizes each proposal's net present value (NPV)& capital requirements for the next 5 years. because of the limited cash availability not all proposal can be funded. Chloe's objective is to maximize the total NPV of the proposals to be funded. Help Chloe make the decision by sending her a memo w/your recommendations along w/the appropriate STORM outputs. Oh by the way there are some other conditions:

a) Proposals 1,2 & 3 are alternatives for the proposed but not mandatory construction of a new manufacturing plant.

b) proposls 4, 5 & 6 are alternatives for a mandatory new advertising campaign.

c) proposals 7 involves the purchase of a new & more powerful computer, & proposal 8 involves the installation of a new computerized inventory control system. Further the approval of the proposed inventory system is contingent on the approval of the computer system.

( Proposal ($000)

1 2 3 4 5 6 7 8 Capital

NPV ($000)-->151 197 119 70 130 253 165 300 Available

Capital YR1 20 100 20 30 50 40 50 80 [230]

required YR2 20 10 10 30 10 20 40 30 [100] ($000) YR3 20 0 10 30 10 20 10 20 [50]

YR4 20 0 10 20 10 20 10 0 [50]

YR5 10 30 10 10 10 20 10 0 [50]

Note numbers in brackets are Capital Available ($000)

I know this is a maximization problem & I know there are 8 variables but I need the coefficients. Also need the constraints. I believe this is a mixed integer problem but I may be wrong. I am putting the info you give me into a cd-rom program that I will run to get an answer. Please give me the inputs and can you some how show the work involved? Please help me.

https://brainmass.com/business/capital-budgeting/capital-budgeting-3334

#### Solution Preview

Decision Variables : X1, X2,X3.....X8 ( for each of the projects)

<br>Objective Function : Max Z = 151*X1 + 197*X2+ 119*X3......300*X8

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<br>Constraints : 1) X1,X2,X3...X8 = Binary Variables ( 1 If a proj is ...