Today is Dec. 31 of Year 0. Your company has invested all of its cash in various projects and would like to sign a 2-years note payable with the bank. The bank is willing to lend up to $200,000 at 5% interest per annum, with interest payable at the end of each year. The principle is due on Dec. 31 of Year 2, and early repayment is not allowed. Additional funds can be borrowed at 7% per annum with the same terms. Cash inflows: You are certain that your projects will earn $60,000 on Dec. 31 of Year 1. You will earn $500,000 at the end of Year 2. Cash outflows: In addition to the above interest payments, you have another outstanding note payable for $170,000 due on Dec. 31 of Year 1. This note payable charges interest at 3% per annum, with interest paid at the end of each year. The interests due on Dec. 31, Year 0 (today) is waiting to be paid after you secure funds. You have the option to refinance a portion of the note on Dec. 31 of Year 1 and delay payment on the unpaid amount by one year (i.e. you can pay a fraction and refinance the rest). However, interest would be charged at 9% in the year of extension. Cash requirement: To ensure a sufficient level of financial liquidity, you want to maintain a cash balance of at least $20,000 at the end of each year, including today. You would like to minimize the total interest paid. Write a linear program to determine how much you should borrow from the bank today, as well as any refinancing decisions. Do not use preliminary calculations to simplify the decisions. > Today is Dec. 31 of Year 0. Your company has invested all of its cash in various projects and would like to sign a 2-years note payable with the bank. The bank is willing to lend up to $200,000 at 5% interest per annum, with interest payable at the end of each year. The principle is due on Dec. 31 of Year 2, and early repayment is not allowed. Additional funds can be borrowed at 7% per annum with the same terms. Cash inflows: You are certain that your projects will earn $60,000 on Dec. 31 of Year 1. You will earn $500,000 at the end of Year 2. Cash outflows: In addition to the above interest payments, you have another outstanding note payable for $170,000 due on Dec. 31 of Year 1. This note payable charges interest at 3% per annum, with interest paid at the end of each year. The interests due on Dec. 31, Year 0 (today) is waiting to be paid after you secure funds. You have the option to refinance a portion of the note on Dec. 31 of Year 1 and delay payment on the unpaid amount by one year (i.e. you can pay a fraction and refinance the rest). However, interest would be charged at 9% in the year of extension. Cash requirement: To ensure a sufficient level of financial liquidity, you want to maintain a cash balance of at least $20,000 at the end of each year, including today. You would like to minimize the total interest paid. Write a linear program to determine how much you should borrow from the bank today, as well as any refinancing decisions. Do not use preliminary calculations to simplify the decisions. >
