Capital Budgeting Problem

A company is planning its capital spending for the next T periods. There are N projects that compete for the limited capital available for investment in period i. Each project requires a certain investment in each period once it is selected. Let be the required investment in project) for period i. The value of the project is measured in terms of the associated cash flows in each period discounted for inflation. This is called the net present value (NPV). Let Vj denote the NPV for project). The problem is to select the proper projects for investment that will maximize the total value (NPV) of all the projects selected. 

Formulation To formulate this as an integer program, we introduce a binary variable for each project to denote whether it is selected or not. 

It is then clear that the following pure integer program will represent the capital budgeting problem  

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The plant has two primary sources for wastewater, the decanter (0.20 kg water/s) and the pot (0.15 kg/s). The plant has been shipiHDg the wastewater for off-site treatment. The cost of wastewater transportation and treatment is 0.01 kg leading to a wastewater treatment cost of proximately SltO.OOO/yr. The plant wishes to stop offsite treatment of wastewater to avoid the cost ( 110,000/yr) and alleviate legal-liability concerns in case of transportation accidents or inadequate treatment of the wastewater. The objective of this problem is to eliminate or reduce to the extent feeble off-site wastewater treatment. For capital budget authorizatitHi, the plant has the following economic criterion (see Appendix DI) ... 

Risk management should be central to the planning, budgeting, and acquisition process. Failure to analyze and manage the inherent risk in all capital asset acquisitions may contribute to cost overruns, schedule shortfalls, and acquisitions that fail to perform as expected. For each major capital project, a risk analysis that includes how risks will be isolated, minimized, monitored, and controlled may help prevent these problems. 

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