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OI 01 Linear Programming

This document describes a linear programming problem faced by Maureen Laird, the CFO of Alva Electric Co. The company needs to invest funds now to cover future cash flow needs for constructing new hydroelectric plants in 5, 10, and 20 years. Maureen can invest in three types of assets that generate income after 5, 10, or 20 years. The problem is to determine the optimal investment mix that minimizes total investment while meeting all cash flow requirements. Instructions are provided to formulate the problem as a linear program and solve it using a spreadsheet and AMPL software.

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150 views

OI 01 Linear Programming

This document describes a linear programming problem faced by Maureen Laird, the CFO of Alva Electric Co. The company needs to invest funds now to cover future cash flow needs for constructing new hydroelectric plants in 5, 10, and 20 years. Maureen can invest in three types of assets that generate income after 5, 10, or 20 years. The problem is to determine the optimal investment mix that minimizes total investment while meeting all cash flow requirements. Instructions are provided to formulate the problem as a linear program and solve it using a spreadsheet and AMPL software.

Uploaded by

petarsek
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Linear programming

Maureen Laird is the chief financial officer for the Alva Electric Co., a
major public utility in the midwest. The company has scheduled the
construction of new hydroelectric plants 5, 10, and 20 years from now
to meet the needs of the growing population in the region served by
the company. To cover at least the construction costs, Maureen needs
to invest some of the companys money now to meet these future
cash-flow needs. Maureen may purchase only three kinds of financial
assets, each of which costs $1 million per unit. Fractional units may be
purchased. The assets produce income 5, 10, and 20 years from now,
and that income is needed to cover at least minimum cash-flow
requirements in those years. (Any excess income above the minimum
requirement for each time period will be used to increase dividend
payments to shareholders rather than saving it to help meet the
minimum cash-flow requirement in the next time period.)

The following table shows both the amount of income generated by


each unit of each asset and the minimum amount of income needed
for each of the future time periods when a new hydroelectric plant will
be constructed.

Maureen wishes to determine the mix of investments in these assets


that will cover the cash-flow requirements while minimizing the total
amount invested.
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Linear programming

(a) Formulate a linear programming model for this problem.

(b)Display the model on a spreadsheet.

(c) Use the spreadsheet to check the possibility of purchasing 100


units of Asset 1, 100 units of Asset 2, and 200 units of Asset 3.
How much cash flow would this mix of investments generate 5,
10, and 20 years from now? What would be the total amount
invested?

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Linear programming

(d)Use the Excel Solver to solve the model by the simplex method.

(e) Use the AMPL software to solve the problem.

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