Question
Larry Fredendall is trying to plan for his daughter Susans college expenses. Based on current projections (it is now the start of year 1), Larry
Larry Fredendall is trying to plan for his daughter Susans college expenses. Based on current projections (it is now the start of year 1), Larry anticipates that his financial needs at the start of each of the following years is as shown in the table below:
Year | 3 | 4 | 5 | 6 |
$ Needed | $20,000 | $22,000 | $24,000 | $26,000
|
Larry has several investment choices to choose from at the present time, as listed in the table below. Each choice has a fixed known return on investment and a specified maturity date.
Assume that each choice is available for investment at the start of every year and also assume that returns are tax free if used for education.
Choice | ROI | Maturity |
A | 5% | 1 year |
B | 13% | 2 years |
C | 28% | 3 years |
D | 40% | 4 years |
Because choices C and D are relatively risky choices, Larry wants no more than 20% of his total investment in those two choices at any point in time.
Larry wants to establish a sinking fund to meet his requirements. Note that at the start of year 1, the entire initial investment is available for investing in the choices. However, in subsequent years, only the amount maturing from a prior investment is available for investment.
Formulate as a linear programming problem and solve.
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