Scenario: 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...

Scenario:

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.

Purchase 1:

, an ordinary annuity and an annuity due, both compounding semi-annually and paying 4.5% annual interest over a 5-year period. Your 5-year budget includes saving $3,100.00 each six months. 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.

Purchase 2:

After careful review of your maintenance log, you also realized that you will need to replace a fence post molding machine that sells for $18,000.00. 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 quarterly, and earns a 4.8% annual rate.

Your essay should in include the following information

1.   Calculate the sinking fund payment required for the fence post molding machine.

2.   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 fund investment.

3.   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.

Purchase 1)

A)   Future Value of the Ordinary Annuity:

       Number of Periods X periods per year

         5 X 2 = 10

B)   Future of annuity due:

FV = annuity payment X table value X (1 + period interest)

FV= ...... X (1 + 0.045)

FV = ....

The difference between Ordinary annuity and annuity due is that with the Ordinary the payments are due at the end of each term, where in the annuity due the payments are due immediately, in most cases in the beginning of each term.

Even though, with the annuity due you will get more interest back, I would choose the Future annuity because of the payment time frame. Since the payment is due at the end of each period, it helps with being prepared to make such payment. In the future, when all my projects are completed, and I have a more elusive cash flow, I will change my annuity to annuity due.

Purchase 2)

Choosing ordinary annuity was the right chose, since I will need to add another project to my list. I must replace a fence post molding machine in the next three years. The price for this machine is $18,000.00. to do so I will use the Sinking fund. It will compound interest quarterly. To figure out the Future Value we will do the following calculations:

FV = $18,000.00

Table Value = number of Periods X inters per Period 

3 years X 4 Periods per year = 4 X 3 = 12 Periods