Information on a Prospective Investment for Wells Financial Services Is

Essay

Information on a prospective investment for Wells Financial Services is given below. $$\begin{array} { l | c c c c } && { \text { Period } } \\& 1 & 2 & 3 & 4 \\\hline \text { Loan Funds Available } & 3000 & 7000 & 4000 & 5000 \\\text { Investment Income } & & & & \\\text { (\% of previous period's investment) } & & 110 \% & 112 \% & 113 \% \\\text { Maximum Investment } & 4500 & 8000 & 6000 & 7500 \\\text { Payroll Payment } & 100 & 120 & 150 & 100\end{array}$$ In each period,funds available for investment come from two sources: loan funds and income from the previous period's investment.Expenses,or cash outflows,in each period must include repayment of the previous period's loan plus 8.5% interest,and the current payroll payment.In addition,to end the planning horizon,investment income from period 4 (at 110% of the investment)must be sufficient to cover the loan plus interest from period 4.The difference in these two quantities represents net income,and is to be maximized.How much should be borrowed and how much should be invested each period?