We are considering investment in a production facility for Thneeds, a made-to-order product. (Thneeds are an imaginary product from the Dr. Suess children’s story The Lorax.) You know the nominal capacity of the facility, its expected cost, how long it will take to build, the price of Thneeds, variable production costs and the interest rate that will be charged by the bank. The question you need to address is whether or not the investment is a good idea.
At this point you will probably recognize that this is a very different problem than the ones we have been looking at. We are not trying to come up with a hypothesis about where behavior comes from but simply trying to track the consequences of some relatively simple assumptions. Building the financial portions of models often has this straightforward, almost mechanical, flavor. Constructing a model to answer this question does not present any large conceptual impediments. As a bonus, once the financial formulations are constructed we will see how easily they can be integrated into other models.
