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

1. First, we will find the future worth , at end of 3 yrs. of the Certificate of deposit & the lot(if purchased

Value/worth of CD at maturity in 3 years=	40000*1.04^3=	44995
Net Value of the lot in 3yrs.	45000-(500*1.04^3)=	44438
ie. Value of lot LESS value of withdrawal penalty in 3yrs.
	Difference	557

From the above calculations, it can be seen that investing in CDs is a better option , which earns more money , than premature withdrawal from the same & purchasing the lot .

But here you need to consider the costs that will be incurred towards equipment storage for your business---if that will exceed the amount saved , as above, ie. 557---most practically , it will-- as this is a one-time saving , but the rent will be incurred for longer periods, say a year or two.

In that case, prioritising your needs at the moment, it will be advisable to withdraw the CD & purchase the lot

as the geometrical average return on net money invested in the lot, ie. 40000-penalty 500= 39500 becomes $ 45000 in 3 yrs.

(45000/39500)^(1/3)-1=

4.44%

This return justifies the invetsment in lot as 4.44% > 4% of the CDs

This will also save the costs & efforts of searching for a storage space for the equipment in future.

Given that the  business involves large capital equipment purchases, this decision will be in the right direction.