Define the disc cash flow as the objective

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Reference no: EM133411689

Case Study: A money manager for a university endowment has received a $10 million donation to
invest. The intent is to establish a cash flow stream for the next 25 years. The goal is to have an annual payout that begins at $50,000 and grows by 3% per year. The manager has identified a list of 0 different bonds to invest in. The manager's goal is to determine which bonds to purchase now so as to maximize the total discounted return while guaranteeing the bond's pay out the required annual funds. The manger has specified a limit of 2,500 units of any individual bond.

The data on tab 3 lists the 50 bonds available for purchase annual payout for each of the next 25 years. The data includes the payout each year based on the bond's coupon and maturity date. The investment column contains a place to identify the number of bonds purchased of each type.

Questions:

First, complete the model.
• Calculate the cash flow in each year as the (sum) product of the Investment column and the appropriate bond cash flow column.
• Calculate the cash flow required based on the Initial Cash Required and the Annual Increase fields.
• Calculate the Disc Cash Flow as the product of the Cash Flow and discount Factor column.

Now specify the optimization model.
• Define the Investment column as the decision variables.
• Define the Disc Cash Flow as the Objective. (max)
• Establish the constraint that the Cash Flow must exceed the Cash Required field.
• Establish a constraint that limits the Investment to be less than the Available Funds.
• Constrain the Investments to be non-negative integers and less than the Max per Bond setting.
• We wish to solve the model using the standard LP /Quadratic engine to guaranteed optimality (0% tolerance).

Reference no: EM133411689

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