Solved: The Aberdeen Construction Corporation (ACC) is trying to complete its investment plans

The Aberdeen Construction Corporation (ACC) is trying to complete its investment plans for the next five years.

Currently ACC has $3.8 million available for investment. Furthermore, ACC expects income streams from other

business ventures over the next 4 years. These data are summarized in the table below. (For simplicity of modeling,

you may assume that these income streams occur at one year intervals.)

Cash Available for Investment ($millions)

There are three development projects that ACC is considering. The first is the Aberdeen Vacation Resort on the

picturesque banks of Grays Harbor. A second project, the Northshore Mall, would be a shopping complex adjacent

to Grays Harbor. The third project, the Aberdeen Office Building, is a 6-story office building to be built in downtown

Aberdeen starting in two years, after the demolition of several smaller buildings. If ACC participates fully in these

projects, each would have the projected cash flow streams over the next four years as indicated in the following table.

(Again, for simplicity, you may assume these cash flows occur at one year intervals.) The estimated value of each

project five years from now is also indicated.

Assume that ACC may participate either fully, fractionally (with a partner), or not at all in any or all of the three

projects. If ACC participates in a project fractionally at less than 100%, all the cash flows, and the final value of that

project for ACC are reduced proportionally. For example, if ACC participates at 50% in the Aberdeen Vacation

Resort, the cash flows would be –$2.9 million (now); –$1.2 million (one year from now); +$0.9 million (two years

from now); +$1.2 million (three years from now); and +$1.45 million (four years from now). The estimated value to

ACC five years from now would be $5 million. ACC can borrow money at 4% interest per year. At most $4 million

can be borrowed in any given year. The loan must be paid back the following year with interest (e.g., if $1 million is

borrowed two years from now, $1.04 million is due three years from now). By company policy, ACC must maintain a

minimum balance of $1 million at all times. ACC invests any and all surplus funds (including the $1 million minimum

balance) in a money market fund that earns a 1% return per year (e.g., if $2 million in surplus funds is invested 3 years

from now, then $2.02 million would be available 4 years from now). ACC would like to know how much to participate

in each project and how much to borrow each year so as to maximize their net worth five years from now (the value

of their development projects plus any surplus funds five years from now after accounting for all cash flows). Assume

no loan is taken five years from now (it would have no effect on net worth, since the cash asset would be offset by the

loan liability). To simplify the modeling, you may assume that all cash flows occur simultaneously at one year intervals

(now, one year from now, etc.). Set up and solve a linear programming spreadsheet model for this problem.