Spreadsheet Modelling
(SMOD)
Prof. Mukul Gupta
Exercise
• In the starting of 1995, PP Waterballs Ltd. has diversified to the
business of automobile parts manufacturing by investing
$30,000. In 1995, 10500 units were sold at a price of $6.9 and
the cost was $5.5 per unit. The industry experts have predicted
increase in the sales at 3% for next four years. Also, the cost and
price per unit have been predicted to be increased at 5% and 4%
respectively for next four years. The interest rate is 18%. If the
tax rate is 35% and can be assumed to be more or less same for
next four years, then what would be the NPV of this project?
• Also, do the scenario analysis on NPV for the data given below:
1995 Sales Annual Sales Growth 1995 Sales Price
Best Case 20000 7.5% 8.9
Most Likely 10000 4.5% 7.1
Worst Case 5000 2% 5.0
Optimization Problem
• What is optimization?
• A mathematical process of obtaining the minimum (or
maximum) value of a function subject to some given
constraints.
• Optimization is used every day.
• Examples:
• Choosing which route to drive to a destination
• Allocating study time for several classes
• How often to change a car’s air filter.
• and many more…
3
Optimization Requirements
• A clear understanding of what is needed to be
optimized.
• Ex: minimized cost or maximized product quality
• A clear understanding of the constraints on the
optimization.
• Ex: safety concerns, customer requirements, budget
limits etc.
• A way to represent these mathematically (i.e., a
model)
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Definitions
• Objective function
• A mathematical representation of whatever you want to
minimize (or maximize) – such as cost, time, loss etc.
• Variables
• Things that can be changed to influence the value of
the objective function
• Constraints
• Equalities or inequalities that limit the amount the
variables may be changed
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Optimization Problem
• Solver uses techniques from the operations
research to find optimal solutions for decision
problems.
• File > Options > Add-Ins > Excel Add-In > Go >
Solver Add In > OK
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Solver : Components
• Target Cell (objective function)
• Profit – Maximize
• Cost – Minimize
• Changing cell
• Constraints
• Solving Method: Simplex LP
• Linear programming (LP, also called linear
optimization) is a method to achieve the best outcome
(such as maximum profit or lowest cost) in a
mathematical model whose requirements are
represented by linear relationships.
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Solver : Exercise
• You are the production manager for Dawaiwala Ltd.
that produces six drugs at its plant. Production of one
pound of each drug requires labour and raw material
as given below with other information:
Drug-1 Drug-2 Drug-3 Drug-4 Drug-5 Drug-6
Labour used for each pound of 6 5 4 3 2.5 1.5
drug (in hrs)
Raw material required for each 3.2 2.6 1.5 0.8 0.7 0.3
pound of the drug (in pound)
• (per pound)
Price 12.50 11.00 9.00 7.00 6.00 3.00
Cost (per pound) 6.50 5.70 3.60 2.80 2.20 1.20
Demand (in pound) 960 928 1041 977 1084 1055
• This month, 4,500 hours of labour and 1,600 pounds
of raw material are available. How can this company
maximize its monthly profit?
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Solver
• Product Made <= Demand ( if meeting the
demand is not mandatory)
• For the products it is mandatory to fulfil the
demand : Product Made >= Demand)
• Product Made is integer or non-integer (depends
on problem; unit of product v/s kgs of product)
• Infeasible solution
• This message appears when Solver could not find any
combination of values for the decision variables that
allows all of the constraints to be satisfied
simultaneously.
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Solver: Exercise
• SMOD-Manufacturing Ltd. is considering 9 projects. The expected NPV
from each project and the expected capital expenditures during next two
years are given in the following table. The SMOD-Manufacturing Ltd. has
$50 million and $20 million available capital for two years respectively.
Project NPV (million $) Year-1 exp. (million $) Year-2 exp. (million $)
P-1 14 12 3
P-2 17 54 7
P-3 17 6 6
P-4 15 6 2
P-5 40 32 35
P-6 12 6 6
P-7 14 48 4
P-8 10 36 3
P-9 12 18 3
• If SMOD-Manufacturing Ltd. cannot take fraction of the project, then how
the NPV can be maximized? 10
