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INTEGER PROGRAMMING

Advertisement Decisions
The Big Bucks Placements Company wants to make a decision on which advertising
media to use. Its target is to reach 20,000 people at minimum advertising cost. The media
through which it may advertise are three different weekly magazines. Fixed Costs of
developing an advertisement for the three magazines are Rs. 15000, Rs. 20,000 and
Rs. 25000 respectively. Cost of advertising is given on the basis of column length of the
advertisement and is Rs. 200, Rs. 180 and Rs. 230 per column cm. respectively. The
number of people that can be reached by the three magazines depends on the length of the
advertisement and is as follows:
Magazine 1: 300*column length
Magazine 2: 250*column length
Magazine 3: 500*column length
Maximum length of the advertisement is to be restricted to 30cm.
Assuming independence of readership, determine the advertisement plan to attain the
targeted reach at minimum cost.
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CAPITAL BUDGETING AT AGRICO INC.

AGRICO INC. is a fairly large size firm that specializes in the manufacture and sale of
agriculture related heavy equipment. The board of directors of AGRICO INC. are faced
with a capital budgeting decision problem as summarized in Table 1 below. As shown in
the table, they have four investment alternatives to choose from. The dollar amounts
reported in this table are in thousands. Clearly, the board wishes to maximize the present
value of total return, while ensuring that the capital requirements are met with what is
available.

TABLE 1. AGRICO’S CAPITAL BUDGETING ALTERNATIVES

CAPITAL REQUIRED IN YEAR
BY ALTERNATIVE ($000s)

ALTERNATIVE
PRESENT
VALUE OF
NET RETURN
($000s) 1 2 3 4 5
Expand Indian Plant 400 100 50 200 100 0

Expand Capacity in US 700 300 200 100 100 100

Build New Plant in 800 100 200 270 200 100

Chile
Build New Plant in US 1000 200 100 400 200 200
Capital Available Each 500 450 700 400 300
Year

ADDITIONAL CONSTRAINTS

a) Choose exactly 2 projects

b) Choose no more than 3 projects

c) Cannot take project 4 unless project 3 is taken

d) Must take both 1 and 2 or neither

e) Can take #1 if either 3 or 4 is taken

f) Can take #1 only if both #3 and #4 are taken

THE LOCKBOX PROBLEM
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J. C. Nickles receives credit card payments from four regions of the country (West,
Midwest, East, and South). The average daily value of payments mailed by customers
from each region is as follows: the West, $70,000; the Midwest, $50,000; the East,
$60,000; the South $40,000. Nickles must decide where customers should mail their
payments. Since Nickles can earn 20% annual interest by investing these revenues, they
would like to receive payments as quickly as possible. Nickles is considering setting up
operations to process payments (often referred to as lockboxes) in four different cities:
Los Angeles, Chicago, New York, and Atlanta. The average number of days (from the
time payment is sent) until a check clears and Nickles can deposit the money depends on
the city to which the payment is mailed, as shown in Table 1. For example, if a check is
mailed from West to Atlanta, it would take an average of 8 days before Nickles could
earn interest on the check. The annual cost of running a lockbox in any city is $50,000.
Formulate an integer program that Nickles can use to minimize the sum of costs due to
lost interest and lockbox operations. Assume that each region must send all its money to a
single city and that there is no limit on the amount of money that each lockbox can
handle.

To
City 1 City 2 City 3 City 4
(Los Angeles) (Chicago) (New York) (Atlanta)

From

Region 1 West 2 6 8 8

Region 2 Midwest 6 2 5 5

Region 3 East 8 5 2 5

Region 4 South 8 5 5 2

ELECTRICITY GENERATION AT A UTILITY COMPANY

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A problem faced by an electrical utility company each day is that of deciding which
generators to start up and how much electricity to generate. The company in question has
three generators with the characteristics shown in the table below. There are two periods
in a day. The first period demand is 2900 megawatts. The second period requires 3900
megawatts. A generator started in the first period may be used in the second period
without incurring an additional start-up cost. All generators (e.g., A, B, and C) are turned
off at the end of each day.

FIXED START-UP COST PER PERIOD MAXIMUM

COST($) PER MEGAWATT($) CAPACITY IN
GENERATOR EACH PERIOD

A 3000 5 2100

B 2000 4 1800

C 1000 7 3000

BUILDING FIRE STATIONS IN JP NAGAR

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Supposing that for planning purposes, the JP Nagar area has been divided into six zones.
The city planners must now determine where to build fire stations. The city wants to
build the minimum number of fire stations needed to ensure that at least one fire station is
within 15 minutes (driving time) of each zone. The times (in minutes) required to drive
between the zones in JP Nagar are shown in the table below. Develop and integer
program that will tell the city planners how many fire stations should be built and where
should they be located.

To

From Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6

Zone 1 0 10 20 30 30 20

Zone 2 10 0 25 35 20 10

Zone 3 20 25 0 15 30 20

Zone 4 30 35 15 0 15 25

Zone 5 30 20 30 15 0 14

Zone 6 20 10 20 25 14 0
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In-Class Case Discussion

THE HANOVER PLANT

capital budgeting, project selection, sensitivity analysis

New Hampshire Electric Company plans to build a steam generating plant in Hanover
capable of producing 2 million kilowatt hours of electrical energy per day. The major
equipment in the plant will consist of boilers, generators, and condensers. The sources of
supply for these pieces of equipment have been narrowed to 11 manufacturers. In
Exhibit 1 are presented data relative to the equipment offered by these suppliers
[suppliers A through K].

Exhibit 1
Manufacturer's Data

Steam Annual
[thousands of Electricity Initial Cost Operating Cost
cubic feet/ [thousands of [thousands of [thousands of
minute, cfm kwh/day] dollars] dollars]

Boilers: [capacity]
A 100 $50 $50
B 140 $75 $60
C 90 $60 $40
D 80 $50 $20

Generators: [requirements] [capacity]

E 70 500 $600 $60
F 120 650 $600 $75
G 150 $800 $75
H 100 800 $750 $90

Condensers: [capacity]
A 50 $25 $3
I 65 $17 $4
J 70 $20 $4
K 55 $13 $2
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The data in Exhibit 1 are straightforward. For example, line 3 states that supplier C's
boiler has a capacity of 90,000 cubic feet per minute of steam, costs $60,000, and has an
expected annual operating cost of $40,000.

New Hampshire Electric wants the "best" system [combination of boilers, generators, and
condensers] which will meet the energy capacity of the plant [and other requirements at
least cost]. Requirements are given below.

REQUIREMENTS
A The total generator capacity must be at least 2 million kwh/day.

BOILERS GENERATORS CONDENSERS

Steam capacity, in cfm, Must have a capacity of Steam capacity, in cfm,
must be adequate for the at least 2,000,000 kwh/day must be adequate for the
generators served boilers served

B The steam requirements of the generators must be met by the combined capacities
of the boilers selected.

C The steam capacities of the set of condensers selected must be adequate to

accommodate the steam capacities of the boilers.

D Equipment of one supplier is interchangeable with that of another supplier except

in the case of supplier A. Note that supplier A produces both boilers and
condensers. The operating costs quoted for supplier A's boiler and condenser are
based on the assumption that each of A's boilers will be matched with two of A's
condensers, since they constitute a "matched set." If each and every one of the
A's boilers is not used with two of A's condensers then an added $10,000 annual
operating cost can be expected.

E Because of their size and shape it is impracticable to fit one of supplier F's
generators into the plant with one or more of supplier G's generators.

F Supplier K's condensers are of such construction that they must be used in pairs.
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G Management has decided the initial capital outlay for the system should not
exceed $2.3 million.

New Hampshire Electric would like your team to propose a system for the Hanover plant
considering equipment costs, salvage values, operating costs, interest rates and system
output.
Exhibit 2
Salvage Values

Forecast salvage
value at the end of 30
years [thousands of
dollars]
Boilers:
A $5
B $10
C $2
D $1

Generators:
E $50
F $100
G $75
H $40