Multiple projects and constraints
- 1. 1 THUNDER
- 3. MULTIPLE PROJECTS Handling several projects at once means more than dealing with just multiple schedules, it involves multiple risks, multiple stakeholders and multiple functional managers who allocate resources 3
- 5. PROJECT DEPENDENCE • Mutually Exclusive • Negatively Dependent • Positively Dependent 5 Projects A and B are economically dependent if the acceptance or rejection of one changes the cash flow stream or affects the acceptance or rejection of the other
- 6. External constraint Internal limitation CAPITAL RATIONING Capital rationing exists when funds available for investment are inadequate to undertake all projects which are otherwise acceptable. Sources of capital rationing. 6
- 7. PROJECT INDIVISIBILITY A capital project has to be accepted in toto ,i.e,it can not be accepted partially 7
- 8. METHOD OF RANKING 8 The ranking method is a simple approach that arranges the projects on a scale of, say, one to ten, based on their importance.
- 9. SOME RANKING METHOD EXAMPLE QUESTIONS ARE 9
- 10. CONFLICT OF RANKING 10 Performance ranking tends to differ from one criterion to another in a given set of projects Exhibit: NPV, IRR and BCR for five projects Project NPV (Tk) NPV Ranking IRR (Percent) IRR Ranking BCR BCR Ranking A 14776 4 39 1 2.48 5 B 5370 5 22 4 1.21 1 C 14776 3 19 5 1.49 4 D 45688 1 30 3 2.20 2 E 28936 2 31 2 1.83 3
- 11. SOURCES OF CONFLICT 11 • Time disparity • Size disparity • Life disparity
- 12. TIME DISPARITY 12 Initial Outlay PV of cash inflows NPV…………. BCR………….. IRR ……….. Ranking conflict Using NPV and BCR Project A is better Using IRR project B is better Project-A 1,10,000 1,46,000 36,500 1.33 22% Project-B 1,10,000 1,41,000 31,300 1.28 25%
- 13. SIZE DISPARITY 13 NPV…………. BCR………….. IRR ……….. Ranking conflict Using NPV Project A is better Using IRR and BCR project B is better Project A 36,500 1.32 13% Project B 31,300 1.53 22%%
- 14. LIFE DISPARITY 14 Rebuilding project Replacing project VS
- 16. A Mathematical Programming Model Is Formulated In Terms Of Two Broad Categories Of Equations 1. The objective function (goal or objective) 2. The constraint equation (restrictions )
- 19. ASSUMPTIONS 19 • The objectives function and the constraint equations are linear. • The objective function is unidimensional. • The decision variables are considered to be continuous. • Resources are homogeneous.
- 20. FORMULA 20 𝑗=1 𝑛 = 𝑁𝑃𝑉𝑗 𝑋𝑗Maximize 𝑗=1 𝑛 = 𝐶𝐹𝑗𝑡 𝑋𝑗 ≤ Kt (t=0,1,2……m)Subject to
- 22. INTEGER LINEAR PROGRAMMING MODEL CAPITAL BUDGETING Integer Linear programming, in which the objective function and the constraints are linear Integer linear programming model for capital budgeting Maximize 𝑗=1 𝑛 = 𝑁𝑃𝑉𝑗 𝑋𝑗 Subject to 22 𝑗=1 𝑛 = 𝐶𝐹𝑗𝑡 𝑋𝑗 ≤ Kt (t=0,1,2……m)
- 23. Incorporating Project Interdependencies in the Model 23
- 24. “The following kinds of project interdependencies are incorporated in the integer linear programming model 24
- 25. “THE PRINCIPAL STRENGTHS OF THE INTEGER PROGRAMMING MODEL, CLEARLY DEMONSTRATED ABOVE , ARE: 1. It overcomes the problem of capital projects which besets the linear programming model. 2. It is capable of handling virtually any kind of project interdependency.
- 28. THE DICISION MAKER MUST • State an absolute priority order among his goals • Provide a target value for each of his goals 28
- 31. 31 THANKS!