Annuities and sinking funds

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.