Project Selection Problem Statement

The R&D group of a major public utility has identified eight possible projects. A net present value analysis has computed:

The expected revenue for each if it is successful
The estimated probability of success
The initial investment required for each project

Using these figures, the finance manager has computed the expected return and the expected profit for each project as shown in the following table.

Table 7. Project analysis example data summary

Project	Expected Revenue	Success Rate	Expected Return	Initial Investment	Expected Profit
1	$750,000	90%	$675,000	$250,000	$425,000
2	$1,500,000	70%	$1,050,000	$650,000	$400,000
3	$600,000	60%	$360,000	$250,000	$110,000
4	$1,800,000	40%	$720,000	$500,000	$220,000
5	$1,250,000	80%	$1,000,000	$700,000	$300,000
6	$150,000	60%	$90,000	$30,000	$60,000
7	$900,000	70%	$630,000	$350,000	$280,000
8	$250,000	90%	$225,000	$70,000	$155,000
			Total invested	$2,800,000	Total profit
			Budget	$2,000,000	$1,950,000

Unfortunately, the available budget is only $2.0 million, and selecting all projects would require a total initial investment of $2.8 million. Thus, the problem is to determine which projects to select to maximize the total expected profit while staying within the budget limitation. Complicating this decision is the fact that both the expected revenue and success rates are highly uncertain.