Credit Union Fund Allocation.
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. LO 2
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 S2 million available for investment during the coming year. State laws and credit union policies impose the following restriction. on the composition of the loam and investments:
• Risk-free securities may not exceed 30% of the total funds available for investment.
• Signature loans may not exceed 10% of the funds invested in all loans (automobile. furniture, other secured, and signature loans). • Furniture loans plus other secured loans may t exceed the automobile loans.
• Other secured loans plus signature loans may not exceed the funds invested in risk-free securities.
a. How should the $2 million be allocated to each of the loan/investment alternatives to maximize total annual return?
b. What is the projected total annual return?
