Financial Investment Decision - Pyramax Bank Has 1 Million I

Financial Investment Decisionpyramax Bank Has 1 Million In New Fund

Financial Investment Decisionpyramax Bank has $1 million in new funds that must be allocated to home loans, personal loans, and automobile loans. The annual rates of return for the three types of loans are 7% for home loans, 12% for personal loans, and 9% for automobile loans. The bank’s planning committee has decided that at least 40% of the new funds must be allocated to home loans. In addition, the planning committee has specified that the amount allocated to personal loans cannot exceed 60% of the amount allocated to automobile loans. What is the amount of funds that Pyramax Bank should allocate to each type of loan in order to maximize the total annual return for the new funds?

Let: H = be the amount allocated to home loans, P = be the amount allocated to personal loans, A = be the amount allocated to automobile loans.

Question #1 Write the decision variables.

Question #2 Write the objective function using the decision variables (what does Pyramax Bank want to maximize or minimize in this problem)?

Question #3 Write the constraints (limitations) using the decision variables.

Question #4 Combine the objective function and constraints to write a complete LP model for Pyramax Bank to solve their problem.

Sample Paper For Above instruction

In seeking to optimize the allocation of new funds among different loan types, Pyramax Bank aims to maximize its total annual returns from these investments. This strategic decision-making process involves defining decision variables, formulating an objective function, and establishing relevant constraints to model the problem accurately.

Firstly, the decision variables represent the amounts allocated to each loan type, which are crucial for defining the problem mathematically. Let:

  • H = the amount allocated to home loans
  • P = the amount allocated to personal loans
  • A = the amount allocated to automobile loans

The objective function seeks to maximize the total annual return, calculated as the sum of the products of the amounts allocated and their respective rates of return. Mathematically, this is expressed as:

Maximize Z = 0.07H + 0.12P + 0.09A

where Z represents the total annual return.

The constraints incorporate the limitations specified by the planning committee and the total available funds. These include:

  • The total funds allocated should not exceed $1,000,000:
  • H + P + A = 1,000,000
  • At least 40% of the funds must be allocated to home loans:
  • H ≥ 0.40 × 1,000,000 = 400,000
  • The amount allocated to personal loans cannot exceed 60% of the amount allocated to automobile loans:
  • P ≤ 0.60 × A
  • Non-negativity constraints:
  • H, P, A ≥ 0

Combining these elements, the complete linear programming model is formulated as follows:

Maximize Z = 0.07H + 0.12P + 0.09A


Subject to:
  • H + P + A = 1,000,000
  • H ≥ 400,000
  • P ≤ 0.60A
  • H, P, A ≥ 0

Using tools such as Microsoft Excel Solver, this LP model can be solved to determine the optimal allocation of funds. Sensitivity analysis further provides insights into how changes in interest rates and available funds may impact the optimal solution and the total return for the bank.

References

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