Quantitative Methods for Business, Business Economics

Assignment Help:
Please turn in the linear program for the following problem. No need to solve the LP.
Exercise 3 (Multi-Period Fixed Income Capital Budgeting)
As part of the settlement for a class action lawsuit, Hoxworth Corporation must provide sufficient cash to
make the following annual payments:

Year 1 2 3 4 5 6
Payment $190,000 $215,000 $240,000 $285,000 $315,000 $460,000

The annual payments must be made at the beginning of each year, beginning year 1. The judge will
approve an amount that, along with earnings on its investment, will over the annual payments.
Investment of the fund will be restricted to savings and government securities only. Savings pay a 4%
annual interest. It is assumed that this annual savings rate is fixed throughout the six year period. There
are only two government securities that we would like to consider. Their prices and rates are quoted from
The Wall Street Journal as follows:

Govt Security Current Price Fixed Coupon Rate Maturity
1 $1055 per unit 6.750% beginning of year 4
2 $1000 per unit 5.125% beginning of year 5

Hoxworth wants to develop a plan for making the annual payments by investing in the above two
government securities. The par value of each of these securities is $1000, that is, the government will pay
off (redeem) each unit of the security $1000 at the time of maturity. Funds not invested in these securities
will be placed in savings. After the annual payment at the beginning of year 6, there is no need to
maintain any more investment. In other words, all investment and savings accounts can be closed after
the 6th annual payment.
Assume that the interest from both savings and government securities are paid annually. Use linear
programming technique to determine the minimum total amount of cash settlement (F) at the present time
(i.e., the NPV at the beginning of year 1). The plan will be required to pay a trustee the amount required
to fund the plan.
Use the following variables in your linear program:
F = total amount of cash settlement required to meet the six years of payments
G1 = units of government security 1 to be purchased now
G2 = units of government security 2 to be purchased now
Si = investment put in savings at the beginning of year i, for i = 1, 2, 3, 4, 5
Hint: Excluding the non-negativity constraint, the linear program contains six constraints, one for each
year. There is no S6 in this problem since all assets on hand will be applied to the final and 6th
payment. The trick of this problem is to balance the cash inflow with the cash outflow.

Related Discussions:- Quantitative Methods for Business

Monopoly pricing, 1. (classical monopoly pricing) A monopolist faces a dema...

1. (classical monopoly pricing) A monopolist faces a demand curve q (p) = 100   p: (a) If its cost function is C (q) = 2q; what is the optimal level of price and quantity? (b

Economics, Quantitative demand for watermelons = 50-3P(wm) - 20P(hd) + 10 P...

Quantitative demand for watermelons = 50-3P(wm) - 20P(hd) + 10 P(sc) + 0.001(income) P(wm) = $4.00 P(hd) = $3.00 P(sc) = $2.00 Income = $40,000 Quantity supply of watermelons = 2

Why is not aid improving development, Why is not Aid improving development?...

Why is not Aid improving development? Aid not improves development because: • Aid is spent on current consumption • It is spent on unsuitable capital as opposed to suitab

Foreign Direct Investment, Why do all multinational automakers choose to us...

Why do all multinational automakers choose to use FDI to enter this industry? What are the drawbacks of using other entry modes such as exporting and licensing?

Alleviation of poverty, Question 1: Poverty reduction is generally infl...

Question 1: Poverty reduction is generally influenced by changes in average income and income redistribution. Thus, in practice it is hard to adjust to the right balance betwee

Explanation of the instruments of monetary policy, Problem 1 Discuss ho...

Problem 1 Discuss how Monetary policy regulates the money supply in an economy through various instruments. A) Explanation of the instruments of monetary policy Problem

Game Theory, Usage of Game Theory in Managerial decision

Usage of Game Theory in Managerial decision

Cost of production of a firm in the long run, Question 1: (a) Explain,...

Question 1: (a) Explain, giving examples, the law of diminishing returns, clearly bringing out the relationship between cost curves and product curves in the short run. (

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd