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Maximizing the net present value of a project under uncertainty

Wolfram Wiesemann, Daniel Kuhn & Berç Rustem

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abstract We address the maximization of a project’s expected net present value when the activity durations and cash flows are described by a discrete set of alternative scenarios with associated occurrence probabilities. In this setting, the choice of scenario-independent activity start times frequently leads to infeasible schedules or severe losses in revenues. We suggest to determine an optimal target processing time policy for the project activities instead. Such a policy prescribes an activity to be started as early as possible in the realized scenario, but never before its (scenario-independent) target processing time. We formulate the resulting model as a global optimization problem and present a branch-and-bound algorithm for its solution. Extensive numerical results illustrate the suitability of the proposed policy class and the runtime behavior of the algorithm.
   
type journal paper
   
keywords Project scheduling, Net present value, Optimization under uncertainty
   
language English
kind of paper journal article
date of appearance 16-4-2010
journal European Journal of Operational Research
publisher Elsevier (Amsterdam)
ISSN 0377-2217
ISSN (online) 1872-6860
DOI 10.1016/j.ejor.2009.05.045
volume of journal 202
number of issue 2
page(s) 356-367
review double-blind review
   
citation Wiesemann, W., Kuhn, D., & Rustem, B. (2010). Maximizing the net present value of a project under uncertainty. European Journal of Operational Research, 202(2), 356-367, DOI:10.1016/j.ejor.2009.05.045.