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

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