# Making financial decisions

Making financial decisions

Purchase 1 analysis, Making financial decisions

The future value of ordinary annuity and annuity due

1. The future value of ordinary annuity

F.V ordinary= PMT ((1+i) n -1) ÷I)

PMT=\$2500

i=0.08/4 = 0.02%

n = 5 x 4= 20

= 2500 (1.0220 – 1) / 0.02

= \$60,743.42

1. Future value of annuity due

FV annuity due= FV ordinary annuity x (1+i)

=\$60,743.42 x (1+0.02)

=\$ 61,958.29

From the calculations of the two options of annuity the future value of annuity due is greater than that of future value ordinary annuity.  The reason for the difference is that future value annuity payments has its first payment received immediately compared to ordinary annuity, therefore there is an additional period that allows compounding (Latimore & Walden, 2015). The investment option that would benefit Vinyl fence expansion in the future is by investing through future annuity due as it has greater payments of \$ 61,958.29 compared to ordinary annuity (\$60,743.42). Annuity due has a greater interest rate of \$11958.29. It would be wise to consider the future value annuity due as the payments would help cover the costs of the projects of the company in the future, to attain its goals. Making financial decisions

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Purchase 2 analysis

Q2. Calculating sinking fund payment

Fence post molding machine (A) = \$45000.00

t= 3 years

n= 2 payments per year

r= 12%

Payment = A(r/n) ÷ ((1+r/n) nt – 1)

= 45000 (0.06) ÷ ((1+0.06) 6 – 1)

=2700/0.42

Payment = \$6428.57

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Q.3

Comparing the future value of annuity due with the sinking fund payments it is evident that the annuity due on purchase 1 has a smaller rate of interest (8%) and a longer payment period (5 years) and the sinking fund approach on purchase 2 has a higher interest rate of 12% per annum for a 3 year period. To compare the two it is best to understand interest earned in their target period. Making financial decisions

Purchase 1 interest: = FV annuity due – (saving without interest)

=\$ 61,958.29 – (\$2500 x 4(quarterly savings) x 5 years)

= \$61958.29 – \$50000

Interest earned = \$11958.29

Purchase 2 interest = ((semi-annual interest +sink fund payment) x 6(number of payments)) – \$45000

Semi – annual interest= p x r x t = (45000 x0.12x 1)/2 =2700

Sink fund payment = \$6428.57

= (2700+6428.57)6 -45000

= \$ 54771.42 – \$45000

Interest earned = \$9771.42

From the calculations purchase 1 (that uses future value annuity due) has a higher interest return (\$11958.29) than interest earned on purchase 2 (that utilizes sink fund approach) which has an interest of \$9771.42 Making financial decisions

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Q.4

Prioritization of projects is key in an organization as it shows the intent of the company and what matters. Understanding what purchases to make has several advantages such as less important activities are put aside, the right amount of effort and resources can be channeled towards the priority project and unnecessary costs can be cut (Fernbach, Kan & Lynch, 2014). The two purchases can be made after strictly reviewing if the purchase support the purpose of the organization and whether the priorities lead to that goal and long term gains (Fernbach, Kan & Lynch, 2014). One can borrow funds to make the purchases or repair the current machine but that risks increasing costs and reducing income margins due to high repayment interest rates which affect returns on investments. The two purchases should be prioritized as within the first three years one purchase can be done, of the machine, which can begin production, make returns and boost the second purchase. Making financial decisions

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References

Fernbach, P. M., Kan, C., & Lynch Jr, J. G. (2014). Squeezed: Coping with constraint through efficiency and prioritization. Journal of Consumer Research41(5), 1204-1227.

Latimore, V., & Walden, L. (2015). Stocks as Financial Security, Valuation, Risks, and Retirement Portfolios. In Harriett J. Walton Symposium on Undergraduate Mathematics Research (Vol. 13, pp. 13-17). Making financial decisions

## Question: Making financial decisions

For this Assessment you will write an essay to address the requirements described below. Your essay must be carefully planned and written using well-constructed sentences and paragraphs. Make sure that your grammar and spelling are correct. Points will be awarded for content as well as composition. Your essay must be a minimum of 1 page in length with standard 1 inch margins and is required to have at least one reference from a reliable source. This means that you cannot use sites like Wikipedia, Ask.com®, and Yahoo® answers and that only references from reliable sources will earn points. All resources should be cited both as an in-text citation as well as being listed on a reference page in APA format. Making financial decisions

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