Question

SOLVE USING EXCEL SOLVER

In anticipation of the immense college expenses of their child, a couple has started an annual investment program on the child's eighth birthday that will last until the eighteenth birthday. Judging from their expected financial position over the next 10 years, the couple estimates that they will be able to invest the following amounts at the beginning of each year:

Year	1	2	3	4	5	6	7	8	9	10
Amount ($1000)	20	20	25	25	30	35	35	40	40	50

To avoid unpleasant surprises, the couple opts to invest the money very safely. The following options are open to them:

1. Insured savings with 7.5% annual yield.
2. Six-year government bonds that yield 7.9% and have a current market price equal to .98 face value.
3. Nine-year municipal bonds yielding 8.5% and having a current market price equal to 1.02 face value (you pay $1.02 to buy the bond worth $1.)

How should the couple invest the money over the next 10 years? SHOW EXCEL SOLVER SOLUTION (Hint: more than $460K)

Answer 1

Create Excel model as follows:

In the above model, Si represent amount ($ 1000) invested in Insured savings at the beginning of year (i)

Gi represent amount ($ 1000) invested in Govt bonds at the beginning of year (i)

Mi represent amount ($ 1000) invested in Municipal bonds at the beginning of year (i)

Ci represent the cash balanced at the beginning of year (i)

EXCEL FORMULAS:

AD3 =SUMPRODUCT(B3:AC3,$B$17:$AC$17) copy yo AD5:AD15

Enter Solver parameters:

Click Solve button to generate the optimal solution:

ANSWER: Cash balanced at the end of 10 years (beginning of 11th year) = $ 469.55 K

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