Question

The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenue-producing investments together with annual rates of return are as follows:

Type of Loan/Investment	Annual Rate of Return (%)
Automobile loans	8
Furniture loans	10
Other secured loans	11
Signature loans	12
Risk-free securities	9

The credit union will have $1.8 million available for investment during the coming year. State laws and credit union policies impose the following restrictions on the composition of the loans and investments:

• Risk-free securities may not exceed 25% of the total funds available for investment.

• Signature loans may not exceed 12% of the funds invested in all loans (automobile, furniture, other secured, and signature loans).

• Furniture loans plus other secured loans may not exceed the automobile loans.

• Other secured loans plus signature loans may not exceed the funds invested in risk-free securities.

How should the $1.8 million be allocated to each of the loan/investment alternatives to maximize total annual return?

Type of Loan/Investment	Fund Allocation
Automobile loans	$
Furniture loans	$
Other secured loans	$
Signature loans	$
Risk-free securities	$

What is the projected total annual return?

Annual Return = $

Answer 1

Automobile loans	$ 594000
Furniture loans	$ 306000
Other secured loans	$ 288000
Signature loans	$ 162000
Risk-free securities	$ 450000
Return =	$ 169740