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Hi,
under formulation of linear programming model with respect to capital rationing on page 42 of the lecture notes,why would the equation for fraction of the projects and the amount deposited be less than the amount available at time zero? i mean, if the money is not put in the relevant projects then it has to be in the deposits earning interest and if it is not in the deposits it will be in the investments ( all are on one side of the equation- maximising the benefits), this is by all means EQUIVALENT to the amount available at the start of the project. if it is less, where will the extra amount be potentially held?
thanks,john.The amount available is the total that can be borrowed. Borrowing costs 10% and so borrowing at 10% and investing at 7% is losing money. It is better just not to borrow the money (unless it could mean being able to invest better in the projects that are making money).
Have you watched the video working through this example?
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