An investor has two money-making activities, coded Alpha and Beta, available at

Question

An investor has two money-making activities, coded Alpha and Beta, available at the beginning of each of the next four years. Each dollar invested in Alpha at the beginning of a year returns $1.40 two years later (in time for immediate reinvestment). Each dollar invested in Beta at the beginning of a year returns $1.80 three years later. A third investment possibility, construction projects, will become available at the beginning of the second year and will be available at the beginning of the third and fourth years also. Each dollar invested in construction returns $1.20 one year later. The investor starts with $10,000 at the beginning of the first year and wants to maximize the total amount of money he has available at the end of the fourth year.

Explanation / Answer

first year:

code Alpha and Beta both are available for first year

if we start with Alpha, which returns $1.40 two years later

Initial deposit= $10000

so amount available for third year = $10000x$1.40 = $14000

two years remaing and Beta is for 3 years so only choice are to use Alpha or construction projects

if we use Alpha in 3rd year then amount at the end of 4th year=$14000x$1.40 = $19600

----------------------

if we use construction projects whose duration is for 1 year then we need to use it in 4th year too

hence amount at the end of 4th year=$14000x$1.20x$1.20 = $20160

===============================

if we start with Beta in first year whose duration is 3 years

so amount at the end of 3rd year=$10000x$1.80=$ 18000

1 year is remaing so we can use only construction projects

hence amount at the end of 4th year=$18000x$1.20 = $21600

------------------------------

we got 3 cases in which maximum return is $21600

Hence to maximize total amount of money, you should invest $10000 in Beta for first 3 years then reinvest it into construction projects.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.