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

Labour markets in perfect competion, #question.discuss the contention that ...

#question.discuss the contention that the existance of a labour market is characterised by perfect competition is a fallacy.

Firms, different types of firms

different types of firms

Calculate expected return, QUESTION 1 (a) Explain how CAPM provides a ...

QUESTION 1 (a) Explain how CAPM provides a framework for measuring the systematic risk of an individual security in a well-diversified portfolio, using the concept of security

Who will sell and buy permits, There are three industrial firms in a quaint...

There are three industrial firms in a quaint town of South Orange where the municipal government wants to reduce pollution to 120 units from uncontrolled level of 210 units. Three

E-learning be an efficient tool in the training of staf, QUESTION 1 Lea...

QUESTION 1 Learning has always been at the centre of improved performance in organisations. Taking an organisation of your choice, discuss how E-learning might be an efficient

What is absolute poverty and relative poverty, What is absolute poverty and...

What is absolute poverty and relative poverty? Absolute poverty: It is an income level below that essential to meet fundamental requirements. The UN measure of absolute

First-in first-out method (fifo), First-in First-out Method (FIFO) A te...

First-in First-out Method (FIFO) A technique of inventory valuation based on the concept that merchandise is sold in the order of its acknowledgment. In other words, if an elec

Macroeconomic stability in market for promoting development, Define the mac...

Define the macroeconomic stability in market for promoting development. Macroeconomic stability implies that: • Tight fiscal policy that is balanced government budgets and d

Effectiveness of market approaches in promotion development, Analyse the ef...

Analyse the effectiveness of market approaches into promoting development. Assessing the effectiveness of some system, planned, market or mixed depends onto the choice of displ

How can be comparative advantage improved, How can be comparative advantage...

How can be comparative advantage improved? Comparative advantage can be gained or improved through: • Investment during the education and also in training • Investment wi

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