ANNUITIES & SINKING FUNDS 8
Annuities & Sinking Funds
Introduction
When it comes to business investing and expansion, two tools in the toolbox that are often used include sinking funds and annuities. These tools may be a little hard to understand for the layperson. However, with a little consideration and review, the picture can be quite clear. The scenario posed for this assignment is fairly basic. There is a business that owns a vinyl fencing company. There are two purchases that are on the horizon. One is an annuity as is being offered by an insurance company. Regardless of the option chosen, the stated need in terms of savings is $2600 every six months. There is a choice of an ordinary annuity and an annuity due. The second matter centers on the need to purchase a machine. The machine costs $23,000 and it needs to be purchased within the next three years as that is when the existing machine will reach the end of its useful life. The idea is to use a sinking fund that compounds quarterly and that earns an annual rate of 7.2 percent. While one must be careful and diligent in making the necessary calculations, the choices to be made in the above scenarios are quite clear.
Purchase One - Annuity Decision
Ordinary Annuity
The scenario for the annuity makes is clear that the desired payment per six months is $2600. However, since the annuities in question...
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