CHAPTER 12

MORE ADVANCED LINEAR PROGRAMMING CONCEPTS AND METHODS

ANSWERS TO REVIEW QUESTIONS
QUESTIONS
12.1 With regard to Example 12.1
(a)

Solve this problem using MILP, with each generation project specified as a
binary activity.

(b) Solve the problem using MILP, with the requirement that only one natural gas
project can be selected, and at least two of the windfarm, biofuel and solar
panel projects should be included. (Hint: Mutual inclusion requires similar
formulation to mutual exclusion, except for the direction of the inequality sign).
12.2 Suppose in Example 12.5 that the manufacturer wishes to restrict the selection
to only two product lines, and that either hockey or baseball equipment is to be
included in the optimal plan. Modify the model and determine which product
lines constitute the optimal mix.
12.3 A gas company is planning a natural gas export project. This involves three
component projects, namely to develop the gas field, construct a pipeline to a
large coastal city, and develop a gas liquidification and export facility at the
end of the pipeline. In the first case, gas would be sold on-site to another
company. If the pipeline is constructed, the company could find domestic
markets for all its production. A gas liquidification and export facility would
allow substantially higher gas prices to be obtained through exporting. $160M
is available for investment. Gasfield development would cost $50M, pipeline
construction $60M, and development of a liquidification plant and export
facility $45M. Respective NPV payoffs are $20M if gas is sold on site, $10M
for sales domestically, and $30M is gas is exported. Set up a MILP model and
determine the optimal investment policy, taking account of the contingency
relationship between the three component projects.
12.4 A fisherman is considering expansion of his operations. He has the opportunity
to purchase a new fishing boat and net license, to set up an on-shore fish
processing depot and to build a fish canning operation. His current scale of
operation does not warrant setting up the processing plant. The canning
operation cannot proceed unless on-shore processing is carried out. The net
present values for the three projects are $2M, $1M and $1.5M. Year 1 and year
2 capital outlays for the new boat and license are $400,000 and $200,000, for
the processing plant $300,000 and $300,000, and for the canning plant
$200,000 and $300,000. The fisherman has $800,000 in cash reserves, and can
borrow money in years 1 and 2, of up to $1M in total, at a 12% interest rate. Set
up these investment opportunities as a linear programming model, and
determine the optimal investment portfolio.
12.5 A developer is planning to construct a new five-star hotel on a prime inner city

site. Three alternative design and size options are under consideration, with net
capital outlays in the first three years as shown in Table 12.8, after which the
hotel should be self-funding.
Table 12.8. Capital expenditure for alternative hotel designs
Constraint
Capital expenditure, EOY 0 ($M)
Capital expenditure, EOY 1 ($M)
Capital expenditure, EOY 2 ($M)

Design 1
2
12
4

Design 2
5
15
6

Design 3
3
11
8

The developer has $20M in readily available funds, and can borrow further
finance of up to $5M at an interest rate of 14%. The three designs have
estimated net present values over 20 years of $10M, $17M and $ 9M. Set up a
linear programming model which can be used to assist in project choice.

ANSWERS
Answer to Q12.1
A copy from the two Excel files titled Q 12.1 (a) Excel Solutions.xls and Q 12.1
(b) Excel Solutions.xls are provided below. To familiarize with the actual working of
the problem, open up the Excel files and go through them.

(a) Example 12.1 problem solved using MILP.

A
1

Power generator's decision problem - MILP

Constraint or objective
3
4
5
6
7
8

Activity level
Capital outlay ($M)
Renewables output (MW)
Nat. gas output (MW)
NPV

Hydro- Natural Natural Wind- Biofuel Solar Resource Sign Resource

power gas, site gas, site farm
(bin)
panels use
supply
(bin)
A (bin) B (bin) (bin)
(bin)
1
400
420
180

1
170

0
150

250
100

200
80

1
100
70

0
50
50

0
120
90

50

20

670
490
250
330

700
100
200

(b) Example 12.1 Solved using MILP with conditions

A
1

Power generator's decision problem

Constraint or objective
3

Activity level
5 Capital outlay ($M)
6 Renewables output (MW)
4

Hydro- Natural Natural Wind- Biofuel Solar Resource Sign Resource

power gas, site gas, site farm
(bin)
panels use
supply
(bin)
A (bin) B (bin) (bin)
(bin)
1
400
420

0
170

1
150

1
100
70

1
50
50

0
120
90

700
540

700
100

Nat. gas output (MW)

8 Max. nat. gas
9 Min. renewables
10 NPV

250
1

180

100

200
1
80

1
50

1
7

200
1
2
317

1
20

Answer to Q 12.2
Please see the Excel file titled Q 12.2 Excel Solutions.xls.
Answer to Q 12.3
Excel solution is copied below. Go through the Excel titled Q 12.3 Excel Solutions.xls.
A
1 Gas export project
2
3
4
5
6
7
8

Activity level
Capital ($M)
Permission to pipe
Permission to export
NPV

Further Construct Develop liquidn. Resource

develop pipeline to and export facility
use
gas field
coast
1
1
1
50
60
45
155
-1
1
0
-1
1
0
20
10
30
60

Sign

Resource
supply

160
0
0

Answer to Q 12.4
Excel solution is copied below. Go through the Excel titled Q 12.4 Excel Solutions.xls.

200
1
2

1
2

A
Fish canning project

New boat On-shore Canning Borrow, Borrow, Transfer Resource Sign Resource
and net processing plant
year 1 year 2 funds, yr 1->
use
supply
license
(bin)
(bin)
($M)
($M)
yr 2 ($M)
(bin)
1
1
1
0.4531 0.4045
0.3531

3
4

Activity level

Capital, year 1 ($M)

0.4

0.3

0.2

Capital, year 2 ($M)

0.2

0.3

0.3

Permission to process

-1

Permission to can

9 Max. borrowing
10 NPV

-1
-1

0.8

-1.12

0
0

-1

1.5

0
1
-1

1
-0.8929

Answer to Q 12.5
Excel solution is copied below. Go through the Excel titled Q 12.5 Excel Solutions.xls.

0.8576
3.6857

0.8
0
0
0
1

A
Five star hotel

Design Design Design Borrow, Borrow, Borrow, Transfer Transfer Transfer Resource Sign Resource
1 (bin) 2 (bin) 3 (bin) year 1 year 2 year 3 funds, yr funds, yr funds to
use
supply
($M)
($M)
($M) 1-> yr 2 2-> yr 3 obj. fn.
($M)
($M)
2.100000
0
1
0
0
2E-08 3.606
15
06

Activity level

Capital, year 1 ($M)

Capital, year 2 ($M)

12

15

11

Capital, year 3 ($M)

7
8

Max. borrowing
NPV

10

17

-1

1
-1

-1.14
-1

1
-1

1
1
-0.8772 -0.7695

1
-1.14

3.16E-08
3.97E-08

3.606
20

0.02551 14.2253

20
0
0
5