hieving her investment objectives and solve the model. B. If Susan decides she doesn’t want to include all her original $3,800 in her budget at the beginning of the year, but instead she wants to invest some of it directly in alternative longer-term investments, how much does she need to develop a fe
hieving her investment objectives and solve the model. B. If Susan decides she doesn’t want to include all her original $3,800 in her budget at the beginning of the year, but instead she wants to invest some of it directly in alternative longer-term investments, how much does she need to develop a fe
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
A. Help Susan develop a model for the year that will meet her irregular monthly financial obligations while achieving her investment objectives and solve the model.
B. If Susan decides she doesn’t want to include all her original $3,800 in her budget at the beginning of the year, but instead she wants to invest some of it directly in alternative longer-term investments, how much does she need to develop a feasible budget?
![II. Susan Wong's Personal Budgeting Model
After Susan Wong graduated from State University with a degree in management science, she went to work
for a computer systems development firm in the Washington, DC, area. As a student at State, Susan paid her normal
monthly living expenses for apartment_rent, food, and entertainment out of a bank account set up by her parents.
Each month they would deposit a specific amount of cash into Susan's account. Her parents also paid her gas,
telephone, and bank credit card bills, which were sent directly to them. Susan never had to worry about things like
health, car, homeowners', and life insurance; utilities; driver's and car licenses; magazine subscriptions; and so
on. Thus, while she was used to spending within a specific monthly budget in college, she was unprepared for the
irregular monthly liabilities she encountered once she got a job and was on her own.
In some months Susan's bills would be modest and she would spend accordingly, only to be confronted the
next month with a large insurance premium, or a bill for property taxes on her condominium, or a large credit card
bill, or a bill for a magazine subscription, and so on the
next month. Such unexpected expenditures would result in months when she could not balance her checking
account; she would have to pay her bills with her bank credit card and then pay off her accumulated debt in
installments while incurring high interest charges. By the
end of her first year out of school, she had hoped to have some money saved to begin an investment program, but
instead she found herself in debt.
Frustrated by her predicament, Susan decided to get her financial situation in order. First, she sold the
condominium that her parents had helped her purchase and moved into a cheaper apartment. This gave her enough
cash to clear her outstanding debts, with_$3,800 left over to start the new
year with. Susan then decided to use some of the management science she had learned in college
to help develop a budget. Specifically, she decided to develop a linear programming model to help her decide how
much she should put aside each month in short-term investments to meet the demands of irregular monthly
liabilities and save some money. First, Susan went through all her financial records for the year and computed her
expected monthly liabilities for the coming year, as shown in the following table:
Month
Bills
Month
Bills
January
February
March
$2,750
July
$3,050
2,860
2.300
August
September
2.335
1,975
2.120
1,670
April
May
October
1,205
November
2,710
June
1,600
December
2,980](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0d924633-4367-49f4-bc0a-03fb5b26a3cc%2F580683d0-0134-47f6-bbec-d1114b894a0b%2Fjexdh4q_processed.png&w=3840&q=75)
Transcribed Image Text:II. Susan Wong's Personal Budgeting Model
After Susan Wong graduated from State University with a degree in management science, she went to work
for a computer systems development firm in the Washington, DC, area. As a student at State, Susan paid her normal
monthly living expenses for apartment_rent, food, and entertainment out of a bank account set up by her parents.
Each month they would deposit a specific amount of cash into Susan's account. Her parents also paid her gas,
telephone, and bank credit card bills, which were sent directly to them. Susan never had to worry about things like
health, car, homeowners', and life insurance; utilities; driver's and car licenses; magazine subscriptions; and so
on. Thus, while she was used to spending within a specific monthly budget in college, she was unprepared for the
irregular monthly liabilities she encountered once she got a job and was on her own.
In some months Susan's bills would be modest and she would spend accordingly, only to be confronted the
next month with a large insurance premium, or a bill for property taxes on her condominium, or a large credit card
bill, or a bill for a magazine subscription, and so on the
next month. Such unexpected expenditures would result in months when she could not balance her checking
account; she would have to pay her bills with her bank credit card and then pay off her accumulated debt in
installments while incurring high interest charges. By the
end of her first year out of school, she had hoped to have some money saved to begin an investment program, but
instead she found herself in debt.
Frustrated by her predicament, Susan decided to get her financial situation in order. First, she sold the
condominium that her parents had helped her purchase and moved into a cheaper apartment. This gave her enough
cash to clear her outstanding debts, with_$3,800 left over to start the new
year with. Susan then decided to use some of the management science she had learned in college
to help develop a budget. Specifically, she decided to develop a linear programming model to help her decide how
much she should put aside each month in short-term investments to meet the demands of irregular monthly
liabilities and save some money. First, Susan went through all her financial records for the year and computed her
expected monthly liabilities for the coming year, as shown in the following table:
Month
Bills
Month
Bills
January
February
March
$2,750
July
$3,050
2,860
2.300
August
September
2.335
1,975
2.120
1,670
April
May
October
1,205
November
2,710
June
1,600
December
2,980
![Susan's after-taxes-and-benefits salary is $29,400 per year, which she receives in 12 equal
monthly paychecks that are deposited directly into her bank account.
Susan has decided that she will invest any money she doesn't use to meet her liabilities each month in
either 1-month, 3- month, or 7-month short-term investment vehicles rather than just leaving the money in an
interest-bearing checking account. The yield_on 1-month investments is 6% per year nominal; on 3-month
investments, the yield is 8% per year nominal; and on a 7-month investment, the yield is 12% per year nominal. As
part of her investment strategy, any time one of the short-term investments comes due, she uses the principal as
part of her budget, but she transfers any interest earned to another long-term investment (which she doesn't
consider in her budgeting process). For example, if she has $100 left over in January that she invests for 3 months, in
April, when the investment matures, she uses the $100 she originally invested in her budget, but any interest on the
$100 is invested elsewhere. (Thus, the interest is not compounded over the course of the year.)
Susan wants to develop a linear programming model to maximize her investment return during the year so
she can take that money and reinvest it at the end of the year in a longer-term investment program. However, she
doesn't have to confine herself to short term investments that will all mature by the end of the year; she can
continue to put money toward the end of the year in investments that won't mature until the following year. Her
budgeting process will continue to the next year, so she can take out any surplus left over after December and
reinvest it in a long-term program if she wants to.
A. Help Susan develop a model for the year that will meet her irregular monthly financial obligations while
achieving her investment objectives and solve the model.
B. If Susan decides she doesn't want to include all her original $3,800 in her budget at the beginning of the
year, but instead she wants to invest some of it directly in alternative longer-term investments, how
much does she need to develop a feasible budget?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0d924633-4367-49f4-bc0a-03fb5b26a3cc%2F580683d0-0134-47f6-bbec-d1114b894a0b%2Fcj5hchg_processed.png&w=3840&q=75)
Transcribed Image Text:Susan's after-taxes-and-benefits salary is $29,400 per year, which she receives in 12 equal
monthly paychecks that are deposited directly into her bank account.
Susan has decided that she will invest any money she doesn't use to meet her liabilities each month in
either 1-month, 3- month, or 7-month short-term investment vehicles rather than just leaving the money in an
interest-bearing checking account. The yield_on 1-month investments is 6% per year nominal; on 3-month
investments, the yield is 8% per year nominal; and on a 7-month investment, the yield is 12% per year nominal. As
part of her investment strategy, any time one of the short-term investments comes due, she uses the principal as
part of her budget, but she transfers any interest earned to another long-term investment (which she doesn't
consider in her budgeting process). For example, if she has $100 left over in January that she invests for 3 months, in
April, when the investment matures, she uses the $100 she originally invested in her budget, but any interest on the
$100 is invested elsewhere. (Thus, the interest is not compounded over the course of the year.)
Susan wants to develop a linear programming model to maximize her investment return during the year so
she can take that money and reinvest it at the end of the year in a longer-term investment program. However, she
doesn't have to confine herself to short term investments that will all mature by the end of the year; she can
continue to put money toward the end of the year in investments that won't mature until the following year. Her
budgeting process will continue to the next year, so she can take out any surplus left over after December and
reinvest it in a long-term program if she wants to.
A. Help Susan develop a model for the year that will meet her irregular monthly financial obligations while
achieving her investment objectives and solve the model.
B. If Susan decides she doesn't want to include all her original $3,800 in her budget at the beginning of the
year, but instead she wants to invest some of it directly in alternative longer-term investments, how
much does she need to develop a feasible budget?
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