As the owner of a vinyl fencing company, you are making plans for two large purc

Question

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 tor $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 We 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 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. Calculate the sinking fund payment required for the fence post molding machine. Compare and contrast the shorter timeframe and higher interest rate of the sinking fund with the longer term ware-house 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 fund investment. 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.

Explanation / Answer

1. Given,

Quarterly Payment = $2,500

Rate of interest = 8%

Compounding in a Year = 4

Time in Years = 5

Rate per Period = 8% / 4 = 2%

Number of Period = 5 x 4 = 20

Formula to calculate future value of annuity due = FV=PMT / i [(1+i)^n 1] x (1+i)

FV = 2500 /2% [ (1 + 0.02)^20 - 1 ] x (1 + 0.02)

FV = $61,958.29

Formula to calculate future value of ordinary annuity = FV =PMT/i [(1+i)^n 1]

FV = 2500 / 0.02 [ (1+0.02)^20 - 1]

FV = $60,743.42

So, option of Annuity due is better because it has higher future value.

  

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