Business Math – Annuities and Sinking Funds

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Your Assignment is to write an essay discussing how you, as a business owner, can use annuities to achieve business goals. Financial decisions require careful planning and prioritizing, especially when large, capital-intensive purchases are involved. As you establish a process to achieve your company goals, you will need to demonstrate your math skills, consider different investment options, and describe how different investment vehicles can be used effectively to accomplish business goals.

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. You are not making both purchases, but instead are comparing the two alternatives, and drawing a conclusion on which of the two directions to go.

Purchase 1:

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 semi-annually and paying 5% annual interest over a 5-year period. Your 5-year budget includes saving $2,650.00 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 $20,995.00. 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 monthly, and earns a 6% 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 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.
  • 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.
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