14. -12 points TanFin11 3.3.036 My Notes A financier plans to invest up to $500,

Question

14. -12 points TanFin11 3.3.036 My Notes A financier plans to invest up to $500,000 in two projects. Project A yields a return of 12% on the investment of x dollars, whereas Project B yields a return of 16% on the investment of y dollars. Because the investment in Project B is riskier than the investment in Project A, she has decided that the investment in Project B should not exceed 40% of the total investment. How much should the financier invest in each project in order to maximize the return on her investment? (x,y) = What is the maximum return?

Explanation / Answer

Solution:

The total amount that can be invested = $500,000

Maximum amount that can be invested in project B = 40%

Hence, the maximum amount that can be invested in project A = 60%

Return on investment A = 12%

Return on investment B = 16%

As investment B provides a better return on investment, maximum amount should be invested in investment B first and the rest over capital should be invested in project A.

1) Amount to be invested in project A = 0.60 * $500,000 = $300,000

2) Amount to be invested in project B = 0.40 * $500,000 = $200,000

Answer (x,y) = (300000,200000)

3) Maximum return that can be achieved: [0.60 * $500,000 * 0.12] + [0.40 * $500,000 * 0.16] = $36,000 + $32,000 = $68,000 would be the maximum return.

Answer: $ 68000

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