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Ch 12: More Advanced Linear
Programming Concepts and
Methods
Applying Linear Programming to
Those Investments in Which The
Simplifying Assumptions of Basic
LP Analysis Do Not Hold.
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Simple Application of L. P.
In Chapter 11, Linear Programming was
applied to those investments satisfying the
following assumptions:
1. Additivity within activities: resource
consumption is constant per unit of output;
there are no economies of scale.
2. Divisibility within activities: partial investments
can be implemented. There is no requirement
to accept equipment in discrete sizes.
3. Independence of activities: there is no
recognition of productive or financial
interdependencies.
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Extensions to the Basic
Application of L.P.
This chapter extends the basic applications of L P, to
allow investment analysis where projects take on a
more ‘real word’ flavor: ie, where some simplifying
assumptions are relaxed.These extensions include:
1. Allowing more activities and constraints
2. Recognizing indivisible investments
3. Allowing inter-year resource borrowings and
transfers
4. Recognizing interdependent projects
5. Treating mutually exclusive investments
6. Recognizing threshold investments, economies
of scale, multiple goals and investment risk.
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Explanations of the
‘Extension’ Ideas I.
More Activities and Constraints: this notion
deals with more complex resource mixes,
and more constraints, or combinations of
projects
Indivisible Investments: Most projects are
not physically divisible. For example,
power stations are not divisible, although
they can vary in size as to scale.
Inter-Year Transfers: Capital and supplies
may become available at different times, or
surplus amounts may be able to be
transferred between years.
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Explanations of the
‘Extension’ Ideas II.
Interdependent projects: projects may
provide mutual support and
resources, or infrastructure to each
other.
Mutually Exclusive Investments: A
casino built on a site will preclude the
construction of an hotel or sporting
facility. Only one of these projects can
appear in the LP solution.