A foreign bank has a RAROC model. The RAROC model, computed for each specific activity, measures the ratio of the expected yearly net income to the yearly VaR risk estimate. The risk analyst of the bank is asked to estimate the RAROC of the bank’s $500 million loan business.The average interest rate is 10%. All loans have the same probability of default of 2% with a loss given default of 50%. Operating costs are $10 million. The funding cost of the business is $30 million. RAROC is estimated using a Credit VaR for loan businesses, in this case 7.5%. The economic capital is invested and earns 6%.

Determine the RAROC of the bank.