1. EndRun Construction Company

Topics: Capital budgeting, integer programming

Difficulty: Low

The EndRun Construction Company is evaluating capital investment possibilities in five

infrastructure projects.Each project entails different cash outlays and returns now and over the

next four to five years.The table below contains the company's cash flow projections in millions

of US dollars for the five projects (where negative numbers are outflows), including the NPV for

each project at the hurdle rate of 10%.

Project 1 2 3 4 5

Year 0 (now)

(900) (50) (700) (1,200) (300)

Year 1

(800) 500 (400) 350 (950)

Year 2

500 (500) 350 390 700

Year 3

600 90 490 580 600

Year 4

720 (160) 450 620 500

Year 5

840 - 510 - 150

NPV @ 10%

250

-50 218

300 300

The company has an annual capital budget of $2 billion for now and for each of the next five years

(which means that the net cash outflow for the chosen projects must not exceed $2 billion in any

year).Each project must be either fully invested in or not selected at all.

(a)Formulate but do not solve an IP model to determine the projects that EndRun should

select for investment in order to maximize the NPV.Be sure to define your decision variables.

(b) The optimal solution, it turns out, is to select Projects 1, 2, 3, and 5. Comment briefly on why

the optimal solution includes a negative NPV project (Project 2).