A pension fund wishes to invest in one or more of six possible investments. Financial analysts have estimated the present value of effective annual estimate....

      

A pension fund wishes to invest in one or more of six possible investments. Financial analysts have estimated the present value of effective annual estimate. The data in this table indicate that the present value of investing USD 10,000 in alternative 1 is the sum of USD 1,200 (0.12 x USD 10,000) for year 1, USD 1,000 (0.10 x 10,000) for year 2, and USD 800 (0.08 x USD 10,0000 for year 3, for a total present value of USD 3,000.
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Management has decided that USD300,000 will be invested. At least USD50,000 is to be invested in alternative 2 and no more than USD40,000 in alternative 5. Total investment in alternative 4 and 6 should not exceed USD75,000, as these are risky investments.
If the objective is to maximize the present value of total dollar return for the three-year period, formulate the LP model for how much capital to invest in each alternative.
Can you comment on how relevant each underlying LP assumption is to this problem?

Answers


Raphael
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raphael answered the question on January 11, 2019 at 06:04


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