Riker Co. is considering which of 4 different projects to undertake in order to maximize its net present value (NPV). Define X_i as a binary variable that equals 1 if project i is undertaken and 0 otherwise, for i = 1, 2, 3, 4. The NPV and required capital (in millions) for each project are listed below. What is the proper objective function? A) Max X₁ + X₂ + X₃ + X₄ B) Min 60X₁ + 50X₂ + 40X₃ + 20X₄ C) Max 60X₁ + 50X₂ + 40X₃ + 20X₄ D) Max 7X₁ + 10X₂ + 6X₃ + 3X₄ E) Max 170(X₁ + X₂ + X₃ + X₄)

Question

Quizplus · Accepted Answer

The objective is to maximize the net present value (NPV), which is given by the sum of the NPV of each project that is undertaken, weighted by the binary decision variable X_i. Therefore, the proper objective function is Max 60X₁ + 50X₂ + 40X₃ + 20X₄. Choosing any other option will not optimize the NPV of the projects.

Riker Co Is Considering Which of 4 Different Projects to Undertake