Multiperiod financial models
Tamkang Investment Corporation must determine investment strategy for the
firm during the next 3 years. Currently (time 0), $100,000 is available for
investment. Investment A, B, C, D, and E are available. The cash flow
associated with investing $1 in each investment is given. To ensure that the
company’s portfolio is diversified, at most $75000 can be placed in any
single investment. In addition to investments A – E, Tamkang can earn
interest at 8% per year by keeping uninvested cash in money market funds.
Returns from investments may be immediately reinvested. Tamkang cannot borrow
funds, so the cash available for investment at any time is limited to cash on
hand. Formulate an LP that will max cash on hand at time 3.
Cash flows at time
0 1 2 3 Time 0 = present
A -1 0.5 1 0 1 = 1 year from now
B 0 -1 0.5 1 2 = 2 years from now
C -1 1.2 0 0 3 = 3 years from now
D -1 0 0 1.9
E 0 0 -1 1.5
Must decide how much money should be placed in each investment including
money market funds.
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Tamkang Investment Corporation must determine investment strategy for the
firm during the next 3 years. Currently (time 0), $100,000 is available for
investment. Investment A, B, C, D, and E are available. The cash flow
associated with investing $1 in each investment is given. To ensure that the
company’s portfolio is diversified, at most $75000 can be placed in any
single investment. In addition to investments A – E, Tamkang can earn
interest at 8% per year by keeping uninvested cash in money market funds.
Returns from investments may be immediately reinvested. Tamkang cannot borrow
funds, so the cash available for investment at any time is limited to cash on
hand. Formulate an LP that will max cash on hand at time 3.
Cash flows at time
0 1 2 3 Time 0 = present
A -1 0.5 1 0 1 = 1 year from now
B 0 -1 0.5 1 2 = 2 years from now
C -1 1.2 0 0 3 = 3 years from now
D -1 0 0 1.9
E 0 0 -1 1.5
Must decide how much money should be placed in each investment including
money market funds.
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