Linear Programming: Applications IV 73-220 Lecture 08
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Agenda ●
Review for Last Class – Understand the standard approaches to LP formulation both mathematically and in spreadsheet. – Media selection – Production and inventory planning
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More Applications – Financial planning
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Next Class 2
Financial Planning Anne Alyze is the investments manager for an organization that has just signed a contract to purchase some new equipment costing $750,000. The contract calls for payment of $150,000 two months from now and payment of the balance six months from now when the equipment will be delivered. To meet this schedule of payments, Anne intends to immediately set up a sinking fund, whose principal and interest will be used in the future to make a capital expenditure. Because the available investments will generate additional cash before the scheduled payments are due, Anne knows she can start the sinking fund with less than the full purchase price of $750,000. How much less depends on the quality of the investment opportunities available.
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Financial Planning (Cont’d) Investm ent opportu A nity B C D
Available at the beginning of
Months to maturit 1 y 2 3 6
Yield at matur 1.5% ity 3.5% 6.0% 11.0%
Risk Ind ex 1 4 9 7
Months 1, 2, 3, 4, 5, and 6 Months 1, 3, and 5 Months 1 and 4 Month 1 Given the available investment opportunities and the required schedule of payments, Anne’s goal is to develop an investment strategy that minimizes the amount of cash she must initially place in the fund. In developing her strategy, Anne must also ensure she meets two self-imposed guidelines pertaining to risk and liquidity as shown on the next slide.
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Financial Planning (Cont’d) 1. During each month, the average risk index of invested funds cannot exceed 6. 2. At the beginning of each month (after any new investments have been made), the average months to maturity of invested funds cannot exceed 2.5 months. Formulate it as an LP model and solve it by using Solver.
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Next Class ●
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Do more questions from Chap. 4. Review the applications we discussed in class and be aware of the basics of multi-stage financial planning. Download the course notes Re sensitivity analysis.
– We are going to discuss sensitivity analysis by using Excel Solver sensitivity report. – Be aware of the difference between Management Scientist output and Solver sensitivity report. Our exam will be based on Excel Solver sensitivity report. – Rely on the course notes, instead of the textbook, for sensitivity analysis. 6