Running Head: FINANCE

Finance

Name.

Institution.

Date.
FINANCE 2

Purchase One.

My plan is to expand my company and in order to achieve this objective, I must make a decision

to purchase a new warehouse. The insurance company offers two main investment options, that

is, annuity due as well as ordinary annuity. The two annuities are compounded quarterly paying

an annual interest of 8% over a period of 5 years. To calculate interest using ordinary annuity,

then $2,500 savings, compounded quarterly with an 8% interest will generate an ordinary

annuity of $ 58,243. Calculations are as follows:

number of periods=5∗4

¿ 20 periods .

1
interest at quartely basis=8 %
4

¿2%

¿ the chart of Fv ;

¿ 2 % , n=20

¿ 24.3 0

The Future value shall be calculated as;

¿ 2,500∗24.3 0

¿ 60,74 3

¿ $ 60,74 3
FINANCE 3

The amount that was invested in savings which was $ 2,500 shall earn an interest of;

60,743−2,500

¿ 58,2 43

Interest earned using ordinary annuity shall be=$ 58,2 43

Calculations of interest using annuity due generates an interest of $ 59,457. The calculations are

as follows;

using 2,500 of savings then;

¿ 2,500∗24.30∗( 1+2 % )

¿ 2,500∗24.30∗1.02

¿ 61,957

The interest that accrued accumulated to;

¿ 61,957−2,50 0

¿ 59,457

¿ $ 59,4 5 7

Ordinary annuity is termed to be any payments made at the end of quarterly, semi-annually or

annual basis while annuity due is when payments are made at the beginning of each quarterly,

semi-annual or annual basis (Abor, 2017). The major difference depends on the positive

payments either made at the beginning or at the end of the period (Chiu, Hsieh, & Tsai, 2019).

My company would prefer annual annuity to annuity due.

FINANCE 4

The difference as calculated results to $ 1,214, that is

¿ 61,957−60,743

¿ 1,214

This difference could be used in other investments hence, the pay back of $ 60,743 compared to

$ 61,957 is more advantageous.

Purchase Two

Calculating the sinking funds, the new future value becomes, $ 45,000 with an annual rate of

12% and time 3 years. As per calculated my semi-annual payments of $ 6,451. The calculations

are as follows;

Using the future value , calculating ordinary annuity ;

the period becomes 6 , with the rate becoming 6 % .

45,000∗6 %
¿ −1
1+6 % 6

¿ 6451.32

when rounded off ;

¿ $ 6,451

To calculate yearly returns the amount is multiplied by 2;

¿ 2∗6,451

¿ $ 12,903

The yearly paybacks amout ¿ $ 12,903

FINANCE 5

If I increase the rate to 20% then;

The period , n becomes 4 , whilethe rate is at 10 % .

45,000∗10 %
¿ −1
1+10 % 4

¿ 969.6

when rounded off ;

¿ $ 970

Yearly paybacks result to $ 1,940, that is

¿ 970∗2

¿ 1,940

The difference between the rates, 20% and 6% results to $ 5,481 as calculated below;

¿ 6,451−970

¿ 5,481

Sinking funds payments amount to $ 6,451 on semi-annual basis for a period of 3 years using an

annual rate of 12%. If I decide to increase the rate to 20%, then the semiannual payments

decrease to $ 970. This is a difference of $ 5,481, which this amount could be used for other

investments.

To calculate the shorter time and interest rates, we also use the ordinary annuity formulae. My

rate is 20% with the selling cost at $ 45,000. The period is 2 years which the interest rate is

compounded semi-annually. This results to payments made on semi-annual basis amounting to $

FINANCE 6

970. The calculations are as shown above. The interest as stated above was $ 58,243. The low

rate sinking fund accumulated an interest of $ 1,940 per annum. An annual annuity due interest

of $ 59,457 and an interest accumulated to $ 12,903 on a higher rate of 20%, then there would be

an interest of $ 72, 360. This saves an interest of $ 12, 178.

In the long run, saving $12,178 will enable to expand the business, saving for the machinery

needed in 3 years’ time as well as making my semi-annual payments. Finishing up payments for

2 years will cater some amount, $ 34,830, for investing in 2 years for the machine. Putting a

down payment after the 2 years will enable me to cater funds to set up a building for the

machinery. This caters space for achieving my objectives in setting up a warehouse as well as

getting the machine which are determinants of expanding the business within that one year. Extra

products that can be produced by the machine shall be stored at a space in the new warehouse.

Sales of the new products will extra-finance my business ensuring that there is no external

borrowing of funds.
FINANCE 7

References.

Abor, J. Y. (2017). Time Value of Money. In Entrepreneurial Finance for MSMEs (pp. 259-291).

Palgrave Macmillan, Cham.

Chiu, Y. F., Hsieh, M. H., & Tsai, C. (2019). Valuation and analysis on complex equity indexed

annuities. Pacific-Basin Finance Journal, 57, 101175.