Maximize the cash value for the firm at the end

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Reference no: EM1388403

Morton Financial must decide on the percentage of available funds to commit to each of two investments, referred to as A and B, over the next four periods. The following table shows the amount of new funds available for each of the four periods, as well as the cash expenditure required for each investment (negative values) or the cash income from the investment (positive values). The data shown (in thousands of dollars) reflect the amount of expenditure or income if 100% of the funds available in any period are invested in either A or B. For example, if Morton decides to invest 100% of the funds available in any period in investment A, it will incur cash expenditures of $1000 in period 1, $800 in period 2, $200 in period 3, and income of $200 in period 4.Note, however, if Morton made the decision to invest 80% in investment A, the cash expenditures or income would be 80% of the values

shown:

Period New Investment Funds Available Investment A Investment B
1 1500 -1000 -800
2 400 -800 -500
3 500 -200 -300
4 100 200 300

The amount of funds available in any period is the sum of the new investment funds for period, the new loan funds, the savings from the previous period, the cash income from investment A, and the cash income from investment B. The funds available in any period can be used to pay the loan and interest from the previous period, placed in savings, used to pay the cash expenditures for investment A, or used to pay the cash expenditures for investment B. Assume an interest rate of 10% per period for saving and an interest rate of 18% per period on borrowed funds. At the end of period 4, investment A is expected to have a cash value of $3200 assuming a 100% investment in A), and investment B is expected to have a cash value of $2500 (assuming a 100% investment in B). Additional income and expenses at the end of period 4 will be income from savings in period 4 less the repayment of the period 4 loan plus interest. If no more than $200 can be borrowed in any period, determine the proportions of investments A and B and the amount of savings and borrowing in each period that will maximize the cash value for the firm at the end of the four periods.

Formulate and the model. I don't need it to be solved.

Reference no: EM1388403

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