## Exercise 73 Multi Tier Model for Simultaneous Financing and Investment Decisions

A company is faced with two investment projects (xi, X2) and two forms of long-term financial investment (X3, X4) plus one short-term financial investment (x5t) in each period. The company may take up two loans (yi, y2) of up to €1,000,000 each. For the available investment projects and loans, the following monetary consequences are expected (€'000):

 Time t x1 x2 x3 x4 x50 x51 x52 x53 y1 y2 0 100 80 50 100 100 0 0 0 -100 -100 1 -60 -50 0 -10 -105 100 0 0 0 0 2 -60 -50 0 -10 0 -105 100 0 0 0 3 -50 -40 -90 -120 0 0 -105 100 140 130

Tab. 7-11: Net cash outflows per unit of the variables (projects)

Tab. 7-11: Net cash outflows per unit of the variables (projects)

There are no internal funds available.

a) Formulate a multi-tier model for maximising the compound value of the investment and financing programme.

b) The following programmes are proposed:

(The values of the variables X5t are not given here but may be deduced from the other variables.)

Are the programmes feasible and, if so, optimal? Briefly outline the reasons for this.

c) How does the model change if additional cash inflows in the amount of €10,000 are eXpected for each unit of investment project 1 at each of the times t = 4 and t = 5, and 10% is the rate of interest for calculation purposes?

d) In optimising a Hax and Weingartner model, the following endogenous compounding factors qt* where determined for the times t:

q0* = 1.93908; qj* = 1.4916; q2* = 1.243; q3* = 1.1; q4* = 1

Determine the endogenous rates of interest for periods 1-4, and assess the profitability of an additional project with the following cash flow profile:

 Time t 0 1 2 3 4 Cash flows (€'000) -300 120 120 120 110

Tab. 7-12: Cash flow profile of the additional project

Tab. 7-12: Cash flow profile of the additional project

## Financial End Game

How to profit from the global crisis and make big bucks big time! The current global financial crisis has its roots embedded in the collapse of the subprime markets in the United States. As at October 2007 there was an estimated loss on the subprime market of approximately 250 billion. If you want to come out on top, you have come to the right place.

Get My Free Ebook