Susan Wong
I. Executive summary
A lady named Susan Wong is budgeting for the coming year (Year X). During year X, she has to cover monthly expenses as well as irregular monthly financial obligations, and she plans to do so by investing the money not used to cover monthly expenses in either a 1-month, 3-month or 7-month investment scheme whose yields are 6%, 8% and 12% per year nominal respectively. When the investments mature, Susan will use the principals as part of her budget and invest all the interests in a long-term investment that is not considered in her budgeting process.
Susan expects her expenses for the coming years to be as follows:
Month Bills Month Bills
January $2,750 July $3,050
February $2,860 August $2,300
March $2,335 September $1,975
April $2,120 October $1,670
May $1,205 November $2,710
June $1,600 December $2,980
Table 1 – Expected monthly liabilities
Her net salary is $29,400 per year is to be received by her in 12 equal monthly paychecks deposited straight into her bank account. Additionally, she is currently having an extra $3,800 in her pocket to kick off her new year.
Her objective is to gain as much interests as possible provided that all the monthly expenses are promptly and sufficiently covered. However, she is not sure whether she should use the extra $3,800 as part of her budget for the coming year (1) or invest some of it in a long-term investment (2).
The case asks to help her complete the budgeting process in both (1) and (2) by forming a linear programming model.
II. Solutions:
A. Finding necessary data, assumptions and formulas:
In order to simplify and clarify the case, three assumptions are made
1. The concerned coming year is year X, meaning that currently Susan is in year X-1 and the year after year X is year X+1
2. The interests are compounded on a monthly basis.
3. The yield for the long-term investment in case (2) is higher than those of the three investment
A lady named Susan Wong is budgeting for the coming year (Year X). During year X, she has to cover monthly expenses as well as irregular monthly financial obligations, and she plans to do so by investing the money not used to cover monthly expenses in either a 1-month, 3-month or 7-month investment scheme whose yields are 6%, 8% and 12% per year nominal respectively. When the investments mature, Susan will use the principals as part of her budget and invest all the interests in a long-term investment that is not considered in her budgeting process.
Susan expects her expenses for the coming years to be as follows:
Month Bills Month Bills
January $2,750 July $3,050
February $2,860 August $2,300
March $2,335 September $1,975
April $2,120 October $1,670
May $1,205 November $2,710
June $1,600 December $2,980
Table 1 – Expected monthly liabilities
Her net salary is $29,400 per year is to be received by her in 12 equal monthly paychecks deposited straight into her bank account. Additionally, she is currently having an extra $3,800 in her pocket to kick off her new year.
Her objective is to gain as much interests as possible provided that all the monthly expenses are promptly and sufficiently covered. However, she is not sure whether she should use the extra $3,800 as part of her budget for the coming year (1) or invest some of it in a long-term investment (2).
The case asks to help her complete the budgeting process in both (1) and (2) by forming a linear programming model.
II. Solutions:
A. Finding necessary data, assumptions and formulas:
In order to simplify and clarify the case, three assumptions are made
1. The concerned coming year is year X, meaning that currently Susan is in year X-1 and the year after year X is year X+1
2. The interests are compounded on a monthly basis.
3. The yield for the long-term investment in case (2) is higher than those of the three investment
References: (1) http://www.engineeringtoolbox.com/effective-nominal-interest-rates-d_1468.html