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BIP Model

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Reconsider the California Manufacturing Co. case study (attached). The mayor of San Diego now has contacted the company's president, Armando Ortega, to try to persuade him to build a factory and perhaps a warehouse in that city. With the tax incentives being offered the company, Armando's staff estimates that the net present value of building a factory in San Diego would be $7 million and the amount of capital required to do this would be 54 million. The net present value of building a warehouse there would be S5 million and the capital required would be S3 million. (This option will only be considered if factory also is being built there.)

Armando has asked Steve Chan to revise his previous management science study to incorporate these new alternatives into the overall problem. The objective still is to find the feasible combination of investments that maximizes the total net present value. given that the amount of capital available for these investments is $10 million.

a. Formulate a BIP model in algebraic form for this problem.
b. Formulate and solve this model on a spreadsheet.

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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  • "Thank you, this helped a lot. I was not sure how to plug in those numbers to a formula. This was a great help. Now I have to figure out how to explain cost of capital is used in net present value analysis, and how cost of capital is used in net present value analysis. This stuff gets confusing."
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