Case Scenario:
At the start of the year, a company wants to invest excess cash in one-month, three-month and six-month Certificates of Deposit (CD's). (Purchase price and yields for the different CD's appear in the table below - *see attachment). The company is somewhat conservative, however, and wants to make sure that it has a safety margin of cash-on-hand each month; i.e., cash-on-hand left over from the previous month / available at the outset, plus principal and interest from CDs that have become due, minus investments made at the start of the month, must be no less than the month's safety margin.
The size of the monthly safety margins are as follows:
Jan $175,000
Feb $90,000
Mar $80,000
Apr $180,000
May $150,000
Jun $85,000
How should the company maximize total earned interest given that:
- Three-month CDs can only be bought at the start of January and April; six-month CDs can only be bought in January.
- Initial cash available is $400,000.
Yield Term Price Purchase at start of:
1-mo CDs: 1.0% 1 mo. $2,000 January thru June
3-mo CDs: 4.0% 3 $3,000 January and April
6-mo CDs: 9.0% 6 $5,000 January
What are the decision variables and the objective function?
Define cash-flow constraints for each month.
Need equations/procedures in order to enter and solve in Lindo which the class has the program will do themselves.