Question

A financial company is considering investing in three projects. If it fully invests in a project, the realized cash flows (in millions of dollars) will be as listed in the file S14_97.xlsx. For example, project 1 requires a cash outflow of $3 million today and returns $5.5 million three years from now. The company currently has $2 million in cash. At each time point (0, 6, 12, 18, 24, and 30 months from now), the company can, if desired, borrow up to $2 million at 3.5% interest (per six months). Leftover cash earns 3% interest (per six months). For example, if after borrowing and investing at the current time, the company has $1 million, it will receive $30,000 in interest six months from now. The company’s goal is to maximize cash on hand after cash flows three years from now are accounted for. What investment and borrowing strategy should it use?
Assume that the company can invest in a fraction of a project. For example, if it invests in one-half of project 3, it has cash outflows of _$1 million now and six months from now.



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  • CreatedApril 01, 2015
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