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1 Linear Programming Problem

Michael has $40,000 to invest in three funds with different projected annual returns. He can invest no more than 30% of the total in Fund B and 40% in Fund C. A linear programming model is formulated to maximize total annual return by determining the optimal allocation to each fund under the constraints. The solution found using Excel Solver allocates $12,000 to Fund A and B each and $16,000 to Fund C, providing a total maximum annual return of $3,600.

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Al Borja
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345 views2 pages

1 Linear Programming Problem

Michael has $40,000 to invest in three funds with different projected annual returns. He can invest no more than 30% of the total in Fund B and 40% in Fund C. A linear programming model is formulated to maximize total annual return by determining the optimal allocation to each fund under the constraints. The solution found using Excel Solver allocates $12,000 to Fund A and B each and $16,000 to Fund C, providing a total maximum annual return of $3,600.

Uploaded by

Al Borja
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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Michael has decided to invest $40,000 in three types of funds.

Fund A has projected an annual


return of 8 percent, Fund B has projected an annual return of 10 percent, and Fund C has projected
an annual return of 9 percent. He has decided to invest no more than 30 percent of the total amount
in Fund B and no more than 40 percent of the total amount in Fund C.
(A) Formulate a linear programming model that can be used to determine the amount of investments
Michael should allocate to each type of fund to maximize the total annual return.
(B) How much should be allocated to each type of fund? What is the total annual return? Provide
solver screenshot.

1 Linear Programming Problem:


The SOLVER is an add-in built-in function in EXCEL that helps us to provide the solutions to even
the most complex linear programming problems if the optimal solution to the problem exists.
Even if we solve the linear programming manually, it will give us the same answer and the same
methodology of satisfying all the constraints in the most optimized way so as to higher the profits is
used.

2 Answer and Explanation:

Let A represents the investment done in Fund A, B represents the investment done in Fund B, and C
represents the investment done in Fund C.
Let Z be our objective function.

(A)

Max Z=0.08A+0.10B+0.09Cs.t.A+B+C=40000B≤0.3(A+B+C)C≤0.4(A+B+C)Max Z=0.08
A+0.10B+0.09Cs.t.A+B+C=40000B≤0.3(A+B+C)C≤0.4(A+B+C)
So, the constraints will become:

A+B+C=40000−0.3A+0.7B−0.3C≤0−0.4A−0.4B+0.6C≤0A,B,C≥0A+B+C=40000−0.3A+0
.7B−0.3C≤0−0.4A−0.4B+0.6C≤0A,B,C≥0

(B)
Thus, the amount that should be allocated to Fund A, Fund B, and Fund C
is $12000,$12000,$16000$12000,$12000,$16000 respectively.
The total annual return is $3600$3600.

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