A linear programming computer package is needed. As part of the settlement for a class action lawsuit, Hoxworth Corporation must provide sufficient cash to make the following annual payments (in thousands of dollars). Year 1 2 3 4 5 6 Payment 170 195 220 265 295 440 The annual payments must be made at the beginning of each year. The judge will approve an amount that, along with earnings on its investment, will cover the annual payments. Investment of the funds will be limited to savings (at 4% annually) and government securities, at prices and rates currently quoted in The Wall Street Journal. Hoxworth wants to develop a plan for making the annual payments by investing in the following securities (par value = $1,000). Funds not invested in these securities will be placed in savings. Security Current Price Rate (%) Years to Maturity 1 $1,055 6.750 3 2 $1,000 5.125 4 Assume that interest is paid annually. The plan will be submitted to the judge and, if approved, Hoxworth will be required to pay a trustee the amount that will be required to fund the plan. (a) Use linear programming to find the minimum cash settlement necessary (in $) to fund the annual payments. (Round your answer to the nearest dollar.) $ (b) Use the dual value to determine how much more (in $) Hoxworth should be willing to pay now to reduce the payment at the beginning of year 6 to $400,000. (Round your answer to the nearest dollar.) $ (c) Use the dual value to determine how much more (in $) Hoxworth should be willing to pay to reduce the year 1 payment to $150,000. (Round your answer to the nearest dollar.) $ (d) Suppose that the annual payments are to be made at the end of each year. Reformulate the model to accommodate this change. How much would Hoxworth save (in $) if this change could be negotiated? (Round your answer to the nearest dollar.) $

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 6QFR

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A linear programming computer package is needed.

As part of the settlement for a class action lawsuit, Hoxworth Corporation must provide sufficient cash to make the following annual payments (in thousands of dollars).

Year	1	2	3	4	5	6
Payment	170	195	220	265	295	440

The annual payments must be made at the beginning of each year. The judge will approve an amount that, along with earnings on its investment, will cover the annual payments. Investment of the funds will be limited to savings (at 4% annually) and government securities, at prices and rates currently quoted in The Wall Street Journal.

Hoxworth wants to develop a plan for making the annual payments by investing in the following securities (par value = $1,000). Funds not invested in these securities will be placed in savings.

Security	Current Price	Rate (%)	Years to Maturity
1	$1,055	6.750	3
2	$1,000	5.125	4

Assume that interest is paid annually. The plan will be submitted to the judge and, if approved, Hoxworth will be required to pay a trustee the amount that will be required to fund the plan.

(a)

Use linear programming to find the minimum cash settlement necessary (in $) to fund the annual payments. (Round your answer to the nearest dollar.)

(b)

Use the dual value to determine how much more (in $) Hoxworth should be willing to pay now to reduce the payment at the beginning of year 6 to $400,000. (Round your answer to the nearest dollar.)

(c)

Use the dual value to determine how much more (in $) Hoxworth should be willing to pay to reduce the year 1 payment to $150,000. (Round your answer to the nearest dollar.)

(d)

Suppose that the annual payments are to be made at the end of each year. Reformulate the model to accommodate this change. How much would Hoxworth save (in $) if this change could be negotiated? (Round your answer to the nearest dollar.)

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