Scheduling projects to maximize net present value – the case of time-dependent, contingent cash flows

The problem of scheduling activities in a project to maximize its Net Present Value (NPV) has been solved for the case where net cash flow magnitudes are independent of the time of realization. This paper models a more realistic version of this problem – because of incentive payments and penalties for early and late event occurrences, respectively, and because of changing costs of resources over time, net cash flow magnitudes are dependent on the time of realization. We formulate an optimization program for this more general problem and present a simulated annealing solution approach. We test different implementation strategies for this algorithm and suggest a method for choosing neighborhood moves. We compare the NPVs of the solutions obtained from our formulation with the NPVs of early start schedules and with late start schedules for 168 different problems. These computational results show that the simulated annealing approach consistently produces substantially better solutions than the early start or late start schedules. Even poor simulated annealing neighborhood moves give improved solutions for most problems studied.