Prioritizing project selection

Ali Koc; David P. Morton; Elmira Popova; Stephen M. Hess; Ernie Kee; Drew Richards

doi:10.1080/00137910903338545

Prioritizing project selection

Ali Koc, David P. Morton, Elmira Popova, Stephen M. Hess, Ernie Kee, Drew Richards

Industrial Engineering and Management Sciences

Research output: Contribution to journal › Article › peer-review

32 Scopus citations

Abstract

We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit-i.e., net present value (NPV)-of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.

Original language	English (US)
Pages (from-to)	267-297
Number of pages	31
Journal	Engineering Economist
Volume	54
Issue number	4
DOIs	https://doi.org/10.1080/00137910903338545
State	Published - Oct 2009

Funding

The authors thank two anonymous referees for helpful comments that improved the article. This research was supported by the Electric Power Research Institute under contract EP-P22134/C10834, STPNOC under grant B02857, and the National Science Foundation under grants CMMI-0457558, CMMI-0653916, and CMMI-0855577. Abbreviated versions of this article have appeared in Koc¸ et al. (2007, 2008).

ASJC Scopus subject areas

General Engineering
Education
Economics and Econometrics

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10.1080/00137910903338545

Cite this

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title = "Prioritizing project selection",

abstract = "We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit-i.e., net present value (NPV)-of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.",

author = "Ali Koc and Morton, {David P.} and Elmira Popova and Hess, {Stephen M.} and Ernie Kee and Drew Richards",

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AU - Koc, Ali

AU - Morton, David P.

AU - Popova, Elmira

AU - Hess, Stephen M.

AU - Kee, Ernie

AU - Richards, Drew

N1 - Funding Information: The authors thank two anonymous referees for helpful comments that improved the article. This research was supported by the Electric Power Research Institute under contract EP-P22134/C10834, STPNOC under grant B02857, and the National Science Foundation under grants CMMI-0457558, CMMI-0653916, and CMMI-0855577. Abbreviated versions of this article have appeared in Koc¸ et al. (2007, 2008).

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N2 - We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit-i.e., net present value (NPV)-of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.

AB - We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit-i.e., net present value (NPV)-of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.

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Prioritizing project selection

Abstract

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ASJC Scopus subject areas

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