Problem 04: Investor Doe has $10,000 to invest in four projects. The following table gives the cash flow for the four investments Project 1 2 3 Year 1 -1.00 -1.00 0.00 -1.00 Cash flow ($1000) at the start of Year 2 Year 3 Year 4 0.30 1.80 0.20 1.50 0.80 1.90 0.60 0.50 0.60 -1.00 0.40 Year 5 1.20 1.30 0.80 0.95 The information in the table can be interpreted as follows: For project 1, $1.00 invested at the start of year I will yield $.50 at the start of year 2, $.30 at the start of year 3, $1.80 at the start of year 4, and $1.20 at the start of year 5. The remaining entries can be interpreted similarly. The entry 0.00 indicates that no transaction is taking place. Doe has the additional option of investing in a bank account that earns 6.5% annually. All funds accumulated at the end of 1 year can be reinvested in the following year. Formulate the problem as a linear program to determine the optimal allocation of funds to investment opportunities.
Problem 04: Investor Doe has $10,000 to invest in four projects. The following table gives the cash flow for the four investments Project 1 2 3 Year 1 -1.00 -1.00 0.00 -1.00 Cash flow ($1000) at the start of Year 2 Year 3 Year 4 0.30 1.80 0.20 1.50 0.80 1.90 0.60 0.50 0.60 -1.00 0.40 Year 5 1.20 1.30 0.80 0.95 The information in the table can be interpreted as follows: For project 1, $1.00 invested at the start of year I will yield $.50 at the start of year 2, $.30 at the start of year 3, $1.80 at the start of year 4, and $1.20 at the start of year 5. The remaining entries can be interpreted similarly. The entry 0.00 indicates that no transaction is taking place. Doe has the additional option of investing in a bank account that earns 6.5% annually. All funds accumulated at the end of 1 year can be reinvested in the following year. Formulate the problem as a linear program to determine the optimal allocation of funds to investment opportunities.
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 7PROB
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Transcribed Image Text:Problem 04:
Investor Doe has $10,000 to invest in four projects. The following table gives the cash
flow for the four investments
Project
1
2
Year 1
-1.00
-1.00
0.00
-1.00
Cash flow ($1000) at the start of
Year 2
Year 3
Year 4
0.30
0.20
0.80
0.60
0.50
0.60
-1.00
0.40
1.80
1.50
1.90
1.80
Year 5
1.20
1.30
0.80
0.95
The information in the table can be interpreted as follows: For project 1, $1.00 invested
at the start of year 1 will yield $.50 at the start of year 2, $.30 at the start of year 3,
$1.80 at the start of year 4, and $1.20 at the start of year 5.The remaining entries can be
interpreted similarly. The entry 0.00 indicates that no transaction is taking place. Doe has
the additional option of investing in a bank account that earns 6.5% annually. All funds
accumulated at the end of 1 year can be reinvested in the following year. Formulate the
problem as a linear program to determine the optimal allocation of funds to investment
opportunities.
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