Homework 4

Analytic Hierarchy Process (AHP)

1. Taken from “Practical Management Science, by Winston and Albright” Page 373 No. 27
In determining where to invest your money, two objectives, expected rate of return and
degree of risk, are considered to be equally important. Two investments (1 and 2) have the
pairwise comparison matrices shown in Table 7.36.
a. How would you rank these investments?
b. Now suppose another investment (investment 3) is available. The pairwise comparison
matrices for these investments are shown in Table 7.37. (Observe that the entries in
the comparison matrices for investments 1 and 2 have not changed.) how would you
now rank the investments? Contrast your ranking of investments 1 and 2 with your
answer from Part (a).

Table 7.36. Pairwise Comparisons in Investment Problem

Expected Return Investment 1 Investment 2
Investment 1 1 ½
Investment 2 2 1
Degree of Risk Investment 1 Investment 2
Investment 1 1 3
Investment 2 1/3 1

Table 7.37. Expanded Pairwise Comparisons in Investment Problem

Expected Return Investment 1 Investment 2 Investment 3
Investment 1 1 ½ 4
Investment 2 2 1 8
Investment 3 1/4 1/8 1
Degree of Risk Investment 1 Investment 2 Investment 3
Investment 1 1 3 ½
Investment 2 1/3 1 1/6
Investment 3 2 6 1

2. Taken from “Practical Management Science, by Winston and Albright” Page 378 No. 34.
BeatTrop Foods is trying to choose one of three companies to merge with. In making this
decision, seven factors are important:
 Factor 1 : Contribution to profitability
 Factor 2 : Growth potential
 Factor 3 : Labor environtment
 Factor 4 : R&D ability of company
 Factor 5 : Organizational fit
 Factor 6 : Relative size
 Factor 7 : Industry commonality
The pairwise comparison matrix for these factors is as follows:
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The three contenders for merger have the following pairwise comparison matrices for each
factor:

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Use AHP to determine the company that BeatTrop should merge with.