Second exam - Assignment Example

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Second exam

They are: i. Constructing new office building now at a cost of $4,000,000 from funds the business currently has; ii. Investing the $4,000,000 until 2017 when the business is ready to start construction of the building, at which time it would either use all of the $4,000,000; or iii. Obtain a bank loan for $2,000,000 to help finance the cost. The returns or expenditures on the various options need to be calculated and assessed in order to arrive at the best decision. The return on investment for the 4 year period is approximately 11 per cent which represents a total of $434,872. Table 1 below shows the calculations. Option - Invest the $4,000,000 and construct building in 2017 Year Amount Interest   2013 4,000,000 3.50% 4,000,000 2014 4,000,000   4140000 2015 4,140,000   4284900 2016 4,284,900   4434871.5 Interest accumulated ($4,434,872 - $4,000,000)     434,872 ROI     11% Table 1 This return of 11 per cent is considered low when the inflation rate is taken into consideration. The forecasted inflation rate for 2013, 2014, 2015, 2016 and 2017 was 1.7, 1.8, 1.9, 2.0 and 2.2 respectively (IMF 2013). This represents inflation of 9.2% for the 5 year period and 7 per cent from 2013 to 2016. (See Table 2 in the Appendix for calculations). Therefore the real return on the $4,000,000 if invested would be 4 per cent (11% minus 7%). ...Show more

Summary

Decision Making Course Instructor Date ID Introduction The decision to invest now or later is a matter that requires careful consideration in relation to the returns to be obtained and both the current and future rate of inflation. This issue relates to the time value of money which is an important factor in investment decisions…
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