Homework Problem Set #3 The following three problems are to be done and submitted by pairs of students. 1. EndRun Construction Company (8 points) Topics: Capital budgeting, integer programming Recommended Preparation Capital Budgeting Models 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 Year 0 (now) Year 1 Year 2 Year 3 Year 4 Year 5 NPV @ 10% 1 (900) (800) 500 600 720 840 250 2 (50) 500 (500) 90 (160) 3 4 (700) (1,200) (400) 350 350 390 490 580 450 620 510 218 300 5 (300) (950) 700 600 500 150 300 -50 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)