Question 4
[12]
A company is considering the seven independent investment projects listed below. Each project has an initial
investment required, the payoff as a net present value and the time required on the project by an expert
consultant (in months). The company has a total budget of R700 000 and 9 months of expert consultant
time available for all projects. Each project can either be accepted in total or be rejected in total.
Initial investment Net present value Expert consultant time
Project
Project A
R 110 000
R 85 000
Project B
R 125 000
R 105 000
1
1.5
Project C
R 105 000
R 90 000
1
Project D
R 135 000
R 120 000
1.5
Project E
R 145 000
R 125 000
1.5
Project F
R 150 000
R 135 000
2
a. Formulate the problem as a mathematical programming model by specifying the decision variables,
the objective function, the constraints and restriction on decision variables. (See Example 3.13 in the
Study Guide.)
(6)
b. Use the Solver tool in a spreadsheet to find an optimal solution to this capital rationing investment
decision. Provide as your answer the selected projects, the total NPV, total budget and total time
required by the consultant.
(6)