Suppose that we now consider a variation of the horizon model given in Exercise 8, that…

Suppose that we now consider a variation of the horizon model given in Exercise 8, that explicitly includes one-period borrowing bi at rate rb and one-period lending ℓi at rate rℓ. The formulation is as follows:

Maximize vN,

subject to

and that the present value of a dollar in period i is

Exercise 8

In capital-budgeting problems within the firm, there is a debate as to whether or not the appropriate objective function should be discounted. The formulation of the capital-budgeting problem without discounting is as follows:

Maximize vN,

subject to

 

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