Linear Programming:

Applications IV
73-220
Lecture 08

1
Agenda
● Review for Last Class
– Understand the standard approaches to LP
formulation both mathematically and in
spreadsheet.
– Media selection
– Production and inventory planning

● More Applications
– Financial planning

● Next Class

2
 Financial Planning
Anne Alyze is the investments manager for an
organization that has just signed a contract to
purchase some new equipment costing $750,000. The
contract calls for payment of $150,000 two months
from now and payment of the balance six months
from now when the equipment will be delivered.
To meet this schedule of payments, Anne intends to
immediately set up a sinking fund, whose principal
and interest will be used in the future to make a
capital expenditure. Because the available
investments will generate additional cash before the
scheduled payments are due, Anne knows she can
start the sinking fund with less than the full purchase
price of $750,000. How much less depends on the
quality of the investment opportunities available. 3
 Financial Planning (Cont’d)
Investm Available at the Months Yield Risk
ent beginning of to at Ind
opportu maturit matur ex
A
nity Months 1, 2, 3, 4, 1
y 1.5%
ity 1
B 5, and 6 2 3.5% 4
C Months 1, 3, and 5 3 6.0% 9
D Months 1 and 4 6 11.0% 7
Month 1
Given the available investment opportunities and the
required schedule of payments, Anne’s goal is to
develop an investment strategy that minimizes the
amount of cash she must initially place in the fund. In
developing her strategy, Anne must also ensure she
meets two self-imposed guidelines pertaining to risk
and liquidity as shown on the next slide. 4
 Financial Planning (Cont’d)
1. During each month, the average risk index of invested
funds cannot exceed 6.
2. At the beginning of each month (after any new
investments have been made), the average months to
maturity of invested funds cannot exceed 2.5 months.
Formulate it as an LP model and solve it by using Solver.

5
 Next Class
● Do more questions from Chap. 4. Review the
applications we discussed in class and be
aware of the basics of multi-stage financial
planning.
● Download the course notes Re sensitivity
analysis.
– We are going to discuss sensitivity analysis by using
Excel Solver sensitivity report.
– Be aware of the difference between Management
Scientist output and Solver sensitivity report. Our
exam will be based on Excel Solver sensitivity
report.
– Rely on the course notes, instead of the textbook,
for sensitivity analysis.