Question

As a business owner, 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.

You, as a small business owner, are interested in buying a lot for $38,000. You have a CD (certificate of deposit) worth $40,000 now, which earns 4% compounded annually and will mature in 3 years. You are thinking about cashing in the CD to purchase the lot, but cashing in the CD now means you will have to pay a withdrawal penalty of $500. You project the value of the lot will be $45,000 in 3 years and you intend to use it for immediate equipment storage purposes for your business.

For your main post, you will write an essay discussing what you, as a business owner, decide to do - buy or pass on purchasing the lot. In your essay you should address the following:

• Calculate how much your CD will be worth upon maturity.
• Explain the differences (pros and cons) between these two investment options.
• Prioritize and select the best option for your business and explain why that option is preferable.
• Discuss the potential impact this choice will have on the future of your business.

Answer 1

Value of CD upon maturity - If CD is continued then its value after 3 years will be

=40000*(1.04)^³ = 44994.56 where net income will be 4994.56

Whereas if we go with the decision of purchasing the lot this will be the cash flow -

CD (40000-500)	39500
Investment needed	38000
Remaining Amount (considering it is kept in cash and not invested)	1500
Investment Value in 3 years	45000
Total Amount after 3 years (45000+1500)	46500

Differences between two investment options -

1. Risk - the return from CD is more certain and less risky whereas the projected value of lot may or may not be accurate.

2. Return - Clearly the return from investing in lot is more than CD

3. Loss of capital - There are no chances of loss of initial capital in CD but we may lose initial investment also in lot.

Analyzing two options

For a risk averse investor investing in CD is a better investment but I am a business owner and risk is part of business and need to take decisions for better return therefore investment option of buying a lot is the best option.

If i invest in lot I will also have 1500 cash in hand which can be invested at least at risk free rate to earn more.

Potential Impact of investing in lot

1. If value of the lot will be 45000 as projected and more then I will be left with more capital in the future but

2. If value of the lot is 43494.56 (44994.56-1500) I will end up with lesser capital to invest in future.