As the owner of a
vinyl fencing company, you are making plans for two large purchases in the next
3 to 5 years to achieve your business goals.
You plan to expand your vinyl fence company in the future, and must purchase a
new warehouse facility to achieve this goal. Your insurance company is offering
you two very attractive investment options, an ordinary annuity and an annuity
due, both compounding quarterly and paying 8% annual interest over a 5-year
period. Your 5-year budget includes saving $2,500.00 each quarter. To evaluate
which option will benefit the business most, you must evaluate both annuity
options by calculating the future value of each option and explain how the
investment will help you to carry out your goals.
After careful review of your maintenance log, you also realized that you will
need to replace a fence post molding machine that sells for $45,000.00. You
estimate that you will need to purchase a new machine in 3 years’ time as this
machine reaches the end of its useful life. You plan to save for this purchase using
a sinking fund that compounds semi-annually, and earns a 12% annual rate.
Your essay should
in include the following information
1. Calculate the future value of both the ordinary
annuity and the annuity due options being offered by your insurance company.
Explain the differences between these two investment options. Select the best
annuity option for your business and explain why that option is preferable.
2. Calculate the sinking fund payment required for
the fence post molding machine.
3. Compare and contrast the shorter timeframe and
higher interest rate of the sinking fund with the longer term warehouse annuity
option you chose. Be sure to calculate and report how much interest you will
earn from the annuity chosen for the warehouse and the amount of the sinking
4. Develop a plan to prioritize these two
purchases, and discuss the potential impact that these will have on the future
of your business. For example, is expanding your business more important than
saving for and paying cash for a fence post molding machine? Remember, you
could borrow money to finance the fence post molding machine when it eventually
breaks, but financing will cost the business in finance charges.