AgrEvo International, Inc.

Develop a Portfolio of R&D Projects

Calvin Sonntag, the manager of strategic planning for AgrEvo international, Inc. is
leaving the headquarters of the parent company of AgrEvo in Frankfurt Germany. As he
settles in to his airplane seat, he reflects on the series of meetings he had attended,
learning that global competitive pressures are increasing.
AgrEvo is a crop protection and biotechnology firm that manufactures and sells crop
protection products and has a rapidly growing business in the development and sale of the
products of plant biotechnology. Over the past two decades, AgrEvo has introduced
several innovative technologies that have allowed farmers to produce crops in a more
sustainable manner. This commitment to develop and marketing environmentally
responsible crop protection technologies has formed an important component of the
companys competitive advantage.
Calvin wonders what he is going to recommend to senior management regarding AgrEvo
R&D projects. AgrEvo has recognized a need to more thoughtfully manage their portfolio
of R&D projects. In particular, the highest net present value is sought from better
refunding the R&D projects, which may result in deselecting some of them! As Calvin
had explained in his presentation in Frankfurt, different R&D projects require different
amounts of departmental resources over time (each department has its own budget, as
summarized in exhibit 3). AgrEvo has instituted a strategic project management system
that has been correctly determined the necessary resources and net present value for each
of the twelve projects of interest (see exhibits 1 and 2).
Calvin is aware of management wish to maximize the portfolio net present value while
selecting as many projects as possible. He therefore wonders whether his recommended
portfolio will include all the projects. If not, he makes up his mind, he needs to come up
with some reasonable suggestion concerning the resource allocation among the various
departments in the years 2008, 2009 that will make it possible to increase the number of
projects selected. This being a radical and possibly unpopular suggestion he decides to
separate this issue from the rest of the report and deal with it at the very end. Just before
landing, he remembers one other issue which needs to be taken care of. Three projects
belonged to group A. If either project from this group is selected, then the entire group
needs to be selected!
Calvin wonders what he should recommend to the firms senior management. Which
projects should be funded, and which should be canceled? Some senior managers have
expressed the opinion that R&D is underfunded, and Calvin is wondering if this opinion
is correct.

Assignment
1.
Set up an integer programming model to select the best set of projects. For the
Group A all or none condition use a single constraint. Indicate which
projects should be selected, the NPV and the amount of resources used in
2008 and 2009 in each department.
2.
Is there a good case to be made for additional funding?
3.
Calvin has just got off the phone with the vice president of operations. I cant
believe it, he thought to himself. They will never let me finish. Now they
want the entire group B selected if group A is selected. Add this constraint
to the first model (use a single constraint to express this condition), and rerun. Note the result.
4.
Looking at the results obtained from the model that includes the additional
condition of part 3, Calvin is quite convinced management needs to see some
input regarding the original resource allocation to the different departments.
Calvin now is thinking of showing senior management that while keeping the
total budget for each year the same, a better budget allocation plan to the years
2008 and 2009 is possible. He wants to make it even more striking by
eliminating the contingencies between the different projects (such as the
connection between the projects of group A and the condition stated in part
3). He will show management how, by rearranging the departmental R&D
budgets all these conditions could be satisfied, and achieve even better results!
Determine the best budget allocations to departments for the years 2008 and
2009 by adding constraints and some new variables to the model (do not
include the two contingency constraints you used in part 1 and part 3). How
does the projects selection plan be affected? What happens to the total net
present value? What happens to the budget allocated for the years 2008 and
2009?

Exhibit 1: Projects resource requirements ($1000)

A3

A4

B2

Project Identification
B17 B18 B19 B21

2008
266 239
Research
2009
68 132
2008
81 239
Scientific Affairs
2009
68 56
2008
145 126
Field Development
2009
60 82
2008
81 56
Regulatory Affairs
2009
15 48

11

96

15

14

32

12

41

50

2
5

0
5

0
15

0
17

32
5

4
7

50
23

75
10

0 0
17 1

5
42

0
16

0
34

0
7

5
10

9
28

32
15

11
18

0
5

0
1

23
11

0
2

0
3

0
12

6
3

4
17

12
3

18
1

0
1

0
1

19

24

Department A1

D11

D12 E

F
24

Exhibit 2: Project net present value ($ 100,000)

A1
25

A3
33

A4
2.3

B2
5

B17 B18
10 6.1

B19
3.5

Exhibit 3: Department Budget ($1000)

Department
Research
Scientific Affairs
Field development
Regulatory Affairs

2008
600
760
340
292

2009
240
250
250
220

B21
0.5

D11
8.4

D12
9.4

E
3.4

F
11