Question

A fisherman is considering expansion of his operations. He has the opportunity to purchase a new fishing boat and net licence, to set up an on-shore fish processing depot and to build a fish canning operation. His current scale of operation does not warrant setting up the processing plant. The canning operation cannot proceed unless on-shore processing is carried out. The net present values for the three projects are $$\$ 2 \mathrm{M}$$, $$\$ 1 \mathrm{M}$$ and $$\$ 1.5 \mathrm{M}$$. Year 1 and year 2 capital outlays for the new boat and licence are $$\$ 400,000$$ and $$\$ 200,000$$, for the processing plant $$\$ 300,000$$ and $$\$ 300,000$$, and for the canning plant $$\$ 200,000$$ and $$\$ 300,000$$. The fisherman has $$\$ 800,000$$ in cash reserves, and can borrow money in years 1 and 2 , of up to $$\$ 1 \mathrm{M}$$ in total, at a $12 \%$ interest rate. Set up these investment opportunities as a linear programming model, and determine the optimal investment portfolio.

   A fisherman is considering expansion of his operations. He has the opportunity to purchase a new fishing boat and net licence, to set up an on-shore fish processing depot and to build a fish canning operation. His current scale of operation does not warrant setting up the processing plant. The canning operation cannot proceed unless on-shore processing is carried out. The net present values for the three projects are $$\$ 2 \mathrm{M}$$, $$\$ 1 \mathrm{M}$$ and $$\$ 1.5 \mathrm{M}$$. Year 1 and year 2 capital outlays for the new boat and licence are $$\$ 400,000$$ and $$\$ 200,000$$, for the processing plant $$\$ 300,000$$ and $$\$ 300,000$$, and for the canning plant $$\$ 200,000$$ and $$\$ 300,000$$. The fisherman has $$\$ 800,000$$ in cash reserves, and can borrow money in years 1 and 2 , of up to $$\$ 1 \mathrm{M}$$ in total, at a $12 \%$ interest rate. Set up these investment opportunities as a linear programming model, and determine the optimal investment portfolio.
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Capital Budgeting: Financial Appraisal of Investment Projects
Capital Budgeting: Financial Appraisal of Investment Projects
Don Dayananda,… 1st Edition
Chapter 12, Problem 4 ↓

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Step 1: Identify the decision variables Let's denote the decision variables as: x1 = investment in the new fishing boat and net licence x2 = investment in the on-shore fish processing depot x3 = investment in the fish canning operation  Show more…

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A fisherman is considering expansion of his operations. He has the opportunity to purchase a new fishing boat and net licence, to set up an on-shore fish processing depot and to build a fish canning operation. His current scale of operation does not warrant setting up the processing plant. The canning operation cannot proceed unless on-shore processing is carried out. The net present values for the three projects are $$\$ 2 \mathrm{M}$$, $$\$ 1 \mathrm{M}$$ and $$\$ 1.5 \mathrm{M}$$. Year 1 and year 2 capital outlays for the new boat and licence are $$\$ 400,000$$ and $$\$ 200,000$$, for the processing plant $$\$ 300,000$$ and $$\$ 300,000$$, and for the canning plant $$\$ 200,000$$ and $$\$ 300,000$$. The fisherman has $$\$ 800,000$$ in cash reserves, and can borrow money in years 1 and 2 , of up to $$\$ 1 \mathrm{M}$$ in total, at a $12 \%$ interest rate. Set up these investment opportunities as a linear programming model, and determine the optimal investment portfolio.
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