Problem:

1) Finco must determine how much investment and debt to undertake during the next year.

2) Each dollar invested reduces the NVP of the company by 10 cents, and each dollar of debt increases the NVP by 50 cents (due to the deductibility of interest payments). Finco can invest at most $1 million during the coming year. Debt can be at most 40% of investment. Finco now has $800,000 in cash avaliable. All investment must be paid for from current cash or borrowed money.

3) Set up an LP whose solution will tell Finco how to maximize its NPV. Then Graphically solve the LP.

Explain the solution in detail.