The employee credit union at State University is planning theallocation of funds for the coming year. The credit union makesfour types of loans to its members. In addition, the credit unioninvests in risk-free securities to stabilize income. The variousrevenue-producing investments together with annual rates of returnare as follows:

Type of Loan/Investment Annual Rate of Return (%) Automobileloans 7 Furniture loans 10 Other secured loans 11 Signature loans12 Risk-free securities 8

The credit union will have $2.3 million available for investmentduring the coming year. State laws and credit union policies imposethe following restrictions on the composition of the loans andinvestments: • Risk-free securities may not exceed 30% of the totalfunds available for investment. • Signature loans may not exceed10% of the funds invested in all loans (automobile, furniture,other secured, and signature loans). • Furniture loans plus othersecured loans may not exceed the automobile loans. • Other securedloans plus signature loans may not exceed the funds invested inrisk-free securities.

How should the $2.3 million be allocated to each of theloan/investment alternatives to maximize total annual return?

a.Type of Loan/Investment Fund Allocation Automobile loans:

$ Furniture loans

$ Other secured loans

$ Signature loans

$ Risk-free securities

b. What is the projected total annual return?

Annual Return = $