## Question:

Ronald Thump is interested in expanding his firm. After careful consideration, he has determined three areas in which he might invest additional funds: (1) product research and development, (2) manufacturing operations improvements, and (3) advertising and sales promotion. He has $500,000 available for investment in the firm. He can invest in its advertising and sales promotion program every year, and each dollar invested in this manner is expected to yield a return of the amount invested plus 20% yearly. He can invest in manufacturing operations improvements every 2 years, with an

expected return of the investment plus 30% (at the end of each 2-year period). An investment in product research and development would be for a 3-year period, with an

expected return of the investment plus 50% (at the end of the 3-year period). To diversify the total initial investment, he wishes to include the requirement that at least $30,000 must be invested in the advertising and sales promotion program, at least $40,000 in manufacturing operations improvements, and at least $50,000 in product research and development initially (at the beginning of the first year). Ronald wants to know how much should be invested in each of the three alternatives, during each year of a 4-year period, to maximize the total ending cash value of the initial $500,000 investment.

a. Formulate a linear programming model for this problem.

b. Solve the model by using the computer.

Expected Return

The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...