Problem:
Condo Construction Company is going to First National Bank for a loan. At the present time, the bank is willing to lend Condo up to $1 million, with interest costs of 10%. Condo believes that the amount of borrowed funds needed during the current year is normally distributed, with a mean of $700,000 and a standard deviation of $300,000. If Condo needs to borrow more money during the year, the company will have to go to Louie the Loan Shark.
Question 1) The cost per dollar borrowed from Louie is 25¢. To minimize expected interest costs for the year, how much money should Condo borrow from the bank?
Explain the solution in detail.