The Bank of Elkins is allocating a maximum of $200,000 for personal and car loans during the next month. The bank charges 14% for personal loans and 12% for car loans. Both types of loans are repaid at the end of a 1-year period. Experience shows that about 3% of personal loans and 2% of car loans are not repaid. The bank usually allocates at least twice as much to car loans as to personal loans.
(a) Determine the optimal allocation of funds between the two loans and the net create of return on all the loans.
(b) if the percentages of personal and car loans changed to 4% and 3%, respectively, use sensitivity analysis to determine if the optimum solution in (a) will change?