Reliable Investment Corporation is in the process of determining its investment strategy for the next three years. Currently (time t = 0), $100,000,000 is available for investment. The cash flow associated with investing $1 in each of the available investment alternatives (A - E) is given in the table below:
(See attached file for full problem description)
For example, $1 invested in investment B requires a $1 cash outflow at the beginning of time period 1. This investment returns $0.50 at the beginning of time period 2 and $1 at the beginning of time period 3. In addition, investments can be made in alternative E only at the beginning of time period 2, etc.
To ensure that the company's portfolio is diversified, Reliable requires that no more than $75,000,000 can initially be placed in any single investment alternative. In addition to these investments, Reliable can earn interest at 8% per year by keeping un-invested cash in a money market fund.
Once received, cash flows from the investments and the money market fund are immediately available for reinvestment. For example, the positive cash flow received from alternative C at the beginning of time period 1 can be invested in any allowable investments, e.g. alternative B. Since Reliable cannot borrow funds, the cash available for investment at any time is limited to cash on hand.
Formulate and solve a linear program that will maximize the cash on hand at the beginning of time period 3. To accomplish this, what investments should be made and when?
The solution provides a detailed and step-by-step explanation (incl. Excel program) for the problem.