The employee credit union at State University is planning the allocation of fund

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 returns 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 has $2,000,000 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 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 not exceed the automobile loans.

- Other secured loans plus signature loans may not exceed the funds invested in risk

free securities.

How should the $2,000,000 be allocated to each of the loan/investment alternatives to maximize total return? What is the projected total annual return?

Formulate the problem and solve it on a computer by using the Microsoft’s Excel.

Explanation / Answer

Solution.

Calculation of allocation of fund into different investment option.

Type of Loan/investment Interest Rate Investment Interest Amount % of total Fund Automobile loans 8%         600,000      48,000       648,000 30 Furniture loans 10%         200,000      20,000       220,000 10 Other Secured loans 11%         400,000      44,000       444,000 20 Signature loans 12%         200,000      24,000       224,000 10 Risk Free securities 9%         600,000      54,000       654,000 30 Total     2,000,000    190,000    2,190,000 100

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