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Multiple Project & Constraints

1) Multiple project selection involves constraints like project dependence, capital rationing, and project indivisibility. Projects can be mutually exclusive, negatively dependent, or positively dependent/complementary. 2) Capital rationing occurs when available funds are inadequate to undertake all acceptable projects. It arises from internal or external limitations. Projects must be fully accepted or rejected and cannot be partially selected. 3) Common approaches to select projects under these constraints include ranking projects by NPV, IRR or BCR and selecting in order until funds are spent, or defining all feasible project combinations and selecting the highest NPV combination. Problems include conflicts in ranking and project indivisibility.

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1K views

Multiple Project & Constraints

1) Multiple project selection involves constraints like project dependence, capital rationing, and project indivisibility. Projects can be mutually exclusive, negatively dependent, or positively dependent/complementary. 2) Capital rationing occurs when available funds are inadequate to undertake all acceptable projects. It arises from internal or external limitations. Projects must be fully accepted or rejected and cannot be partially selected. 3) Common approaches to select projects under these constraints include ranking projects by NPV, IRR or BCR and selecting in order until funds are spent, or defining all feasible project combinations and selecting the highest NPV combination. Problems include conflicts in ranking and project indivisibility.

Uploaded by

VinayGolchha
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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1

Multiple Projects &


Constraints

CONSTRAINTS

Project dependence, capital rationing and project indivisibility are factors that
restrict isolated project selection.

If the acceptance and rejection of one influences the cash flow stream of the
other or affects the acceptance and rejection of others, then the two projects
are said to be economically dependent.

The three types of economic dependency are as follows:


1. Mutual exclusiveness
2. Negative dependency
3. Positive dependency (complementariness).

Capital rationing occurs when funds available are not adequate to undertake
all the projects that are acceptable otherwise. It also arises because of
internal limitation or an external constraint.

A project cannot be accepted or rejected partially, it is indivisible, and has to


be accepted or rejected in totality.

Approach to Accept or Reject of Project

Method of Ranking

Method of Mathematical
Programming

Method of Ranking

Method Of Ranking

Ranking all the projects in decreasing order of the NPVs, IRRs, or BCRs.

NPV method:The intermediate cash flow is re-invested at a rate of return equal to


the cost of capital of the firm.

IRR method:Cash flow is re-invested at a rate of return equal to or greater than the
Fisherian rate of return.

BCR criterion:The intermediate funds are reinvested at a rate of return greater than
the Fisherian rate of return.

Accepting all projects in that order until the capital budget is exhausted.

Joel Dean is seriously impaired by problems:


I.

Conflict in ranking as per discounted cash flow criteria

II.

Project indivisibility

III.

Feasibility combinations Approach

.Sources

of Conflicts:

I.

Size Disparity

II.

Time Disparity

III.

Life Disparity

EXAMPLE

All combination of feasible projects should be defined, given the capital


rationing constraint and project dependencies. Then choosing a combination
having the highest NPV is known as the feasible combination procedure.

Problems: There are two major problems related to this method


(i) Because of the discounted cash flow criteria, conflict arises in the ranking.
(ii) Indivisibility of the project.

10

Mathematical
Programming Approach

3 Models

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Linear programming model: Assumes that the objective function and the
constraint equation are linear while the decision variables are continuous.

Integer linear programming model: It is presupposed that decision variables


assume a value of 0 or 1.
Advantages of the method:

(a)

It overcomes the problem of partial projects which besets the linear


programming model and.

(b) It is capable of handling virtually any kind of project interdependency like mutual
exclusiveness, contingency and complementary.
..Goal

programming model: It solves the programming problem of minimizing the


absolute deviation from specific goals in order of the established priority
structure.

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THANK YOU

Ishaan Trivedi
Ritesh Kumar
Patro
Saurav Sharma
Rahul Chitlangia
Vineet Gadia

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