Problem 11-11 The employee credit union at State University is planning the allo
ID: 2401090 • Letter: P
Question
Problem 11-11 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 Furniture loans Other secured loans Signature loans Risk-free securities 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 8 10 12 9 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 $1.8 million be allocated to each of the loan/investment alternatives to maximize total annual return? Type of Loan/Investment Automobile loans Furniture loans Other secured Iloans Signature loans Risk-free securities Fund Allocation What is the projected total annual return? Annual Return$Explanation / Answer
Computation:
Condition 1:Maximum Amount that can be invested in the Risk free Securities=$1.8Millions*25%=$0.45
Condition 2:Maximum Amount that can be invested in Signature loans is = Available balance for loans*12%=1.8-0.45=1.35*12%=$0.162.
Condition 3:Furniture Loans(10%)+ Other Secured Loans(11%)= Automobiles loans(8%)
Condition 4:Other Secured Loans(11%)+Signature loans(12%)=Risk Free Securities(9%)
Condition 4
Other Secured Loans(11%)+Signature loans(12%)=Risk Free Securities(9%)
? +$0.162(As per condition 2) = $0.45 ==0.45-0.162=0.288
Therefore
$0.288+$0.162=0.45
Condition 3
Furniture Loans(10%)+ Other Secured Loans(11%)= Automobiles loans(8%)
? + $0.288=?
Remaining funds available =1.8-0.45-0.162-0.288=0.90
0.90/3=0.30===0.30:0.60
Therefore
$0.30+$0.288=S0.60
Type Of loan Fund Investment Interest Rate Return on Investment
Automobile loans 0.60 8% 0.048
Furniture Loans 0.30 10% 0.030
Other Secured Loans 0.288 11% 0.03168
Signature loans 0.162 12% 0.01944
Risk Free Securities 0.45 9% 0.0405
Total 1.80 0.16962
Projected Annual Return=0.16962/1.80=0.09423=9.423%