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12 Capital Budgeting and Binary

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33 views15 pages

12 Capital Budgeting and Binary

Uploaded by

adityatop07
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Session 12

• Integer Linear Programming (ILP)


• Logical conditions
• Fixed Charge Problem
• Minimum Order/Purchase Size
• Binary variables are also useful in
Binary Variables &
modeling several logical conditions
Logical Conditions

Of projects 1, 3 & 6, no more


than one may be selected

X1 + X3 + X6 <= 1
Of projects 1, 3 & 6,
exactly one must be
selected
Binary Variables &
Logical Conditions
X1 + X3 + X6 = 1
Project 4 cannot be selected
Binary Variables & unless project 5 is also selected
Logical Conditions

X4 – X5 <= 0
The Fixed-Charge Problem
• Many decisions result in a fixed or lump-sum
cost being incurred:
– The cost to lease, rent, or purchase a piece
of equipment or a vehicle that will be
required if a particular action is taken.
– The setup cost required to prepare a
machine or to produce a different type of
product.
– The cost to construct a new production line
that will be required if a particular decision
is made.
– The cost of hiring additional personnel that
will be required if a particular decision is
made.
Example Fixed-Charge Problem:
Remington Manufacturing
Defining the Decision Variables

Xi = the amount of product i to be produced, i


= 1, 2, 3

1, if Xi  0

Yi =  i = 1, 2, 3
0, if Xi = 0

Defining the
Objective Maximize total profit
Function
MAX: 48X1 + 55X2 + 50X3
– 1000Y1 – 800Y2 – 900Y3
• Resource Constraints
Defining the 2X1 + 3X2 + 6X3 <= 600 } machining
Constraints 6X1 + 3X2 + 4X3 <= 300 } grinding

5X1 + 6X2 + 2X3 <= 400 } assembly

• Binary Constraints

All Yi must be binary

• Nonnegativity conditions

Xi >= 0, i = 1, 2, ..., 6

• Is there a missing link?


Defining the • Linking Constraints (with “Big M”)
X1 <= M1Y1 or X1 - M1Y1 <= 0
Constraints X2 <= M2Y2 or X2 - M2Y2 <= 0
X3 <= M3Y3 or X3 - M3Y3 <= 0
• If Xi > 0 these constraints force the associated Yi
to equal 1.
• If Xi = 0 these constraints allow Yi to equal 0 or
1, but the objective will cause Solver to choose
0.
• Note that Mi imposes an upper bounds on Xi.
• It helps to find reasonable values for the Mi.
• Consider the resource constraints
Finding 2X1 + 3X2 + 6X3 <= 600 } machining
6X1 + 3X2 + 4X3 <= 300 } grinding
Reasonable 5X1 + 6X2 + 2X3 <= 400 } assembly
Values for M1 • What is the maximum value X1 can assume?
Let X2 = X3 = 0
X1 = MIN(600/2, 300/6, 400/5)
= MIN(300, 50, 80)
= 50
• Maximum values for X2 & X3 can be found
similarly.
MAX: 48X1 + 55X2 + 50X3 - 1000Y1 - 800Y2 - 900Y3

Summary of S.T.: 2X1 + 3X2 + 6X3 <= 600 } machining

the Model 6X1 + 3X2 + 4X3 <= 300 } grinding

5X1 + 6X2 + 2X3 <= 400 } assembly

X1 - 50Y1 <= 0

X2 - 67Y2 <= 0 linking constraints

X3 - 75Y3 <= 0

All Yi must be binary

Xi >= 0, i = 1, 2, 3
Implementing See file Fig6-28.xlsm
the Model
• Avoid the use IF( ) functions to model the relationship
On the use if between the Xi and Yi.

IF( ) functions • Suppose cell A5 represents X1


• Suppose cell A6 represents Y1
• You’ll want to let A6 = IF(A5>0,1,0)
• This leads to local optimal solutions with Excel’s
Solver.

• Treat the Yi just like any other variable


• Make them changing cells.
• Use the linking constraints to enforce the proper
relationship between the Xi and Yi.
Minimum Suppose Remington doesn’t want to
manufacture any units of product 3 unless
Order Size it produces at least 40 units...
Restrictions
Consider,
X3 <= M3Y3
X3 >= 40 Y3

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