Application of Financial Concepts

Due Date Saturday, August 1, 2015

Time Value of Money

Assume that you are the manager of Chilli Pan Restaurant. As a restaurant manager, you need to manage the replacement of restaurant equipment from time to time. You are aware of the wear and tear of equipment, and therefore plan for replacements. For example, a dishmachine that is used every day in a restaurant works efficiently for around three years. Therefore you need to plan for the replacement of this costly and indispensable equipment. You can replace this equipment by leasing or by simply buying it. Let’s assume in this case, you decide to buy the equipment.

You can buy this equipment directly or through a vendor’s credit payment plan. Let’s consider the current cost price of a dishmachine is $11,000.
•To buy the dishmachine directly, you will have to pay more than $11,000 after three years because the cost of the dishmachine may increase over the period of the next three years. Use the Internet or other reliable resources to determine how much money you will need to invest today in a certificate of deposit (CD), earning 5 percent interest, per annum to have $13,000 for the replacement of your dishmachine in the next three years. For this option you will need to calculate the present value amount of $13,000 on an investment that earns 5% per year for three years.
•For buying the dishmachine through the vendor’s credit payment plan, you would be charged 11 percent interest over three years on the $11,000 cost of the dishmachine while making monthly installment payments. For this option you will need to calculate the total future amount that will be paid based on an initial amount of $11,000 for the dishmachine and 11% interest for the duration of the loan which is three years.
•Analyze the monthly payments, total cost, total interest paid, working capital considerations, PV, and FV elements to consider in this financial decision.

Please remember to include this in your submittal: Compare the $13,000 saved in the CD with the total cost for the vendor’s credit payment plan in your discussion analysis below and state which is more advantageous as a method of purchase and why.

Create an analysis document that presents the calculations you made for the financial decision. This document should also highlight the rationale you used to make the choice. Follow MLA standards for writing the document and citing sources. Write your analysis in Microsoft Word and name it W1_A2_lastname_firstname.doc.

Submit the document to this Discussion Area.

Use this Discussion Area to comment on the assignments submitted by at least two of your peers.

Assignment 2 Grading Criteria
Maximum Points

Calculated the amount to be invested in the CD and analyzed the financial decision of buying the dishmachine directly after three years.
10

Analyzed the financial decision of buying the dishmachine through the vendor’s credit payment plan with appropriate calculations.
10

Provided rationale of rejecting or choosing the given option.
10

Commented on the assignments submitted by at least two of your peers.
10

Total:
40

Application of Financial Concepts

Due Date Saturday, August 1, 2015

Time Value of Money

Assume that you are the manager of Chilli Pan Restaurant. As a restaurant manager, you need to manage the replacement of restaurant equipment from time to time. You are aware of the wear and tear of equipment, and therefore plan for replacements. For example, a dishmachine that is used every day in a restaurant works efficiently for around three years. Therefore you need to plan for the replacement of this costly and indispensable equipment. You can replace this equipment by leasing or by simply buying it. Let’s assume in this case, you decide to buy the equipment.

You can buy this equipment directly or through a vendor’s credit payment plan. Let’s consider the current cost price of a dishmachine is $11,000.
•To buy the dishmachine directly, you will have to pay more than $11,000 after three years because the cost of the dishmachine may increase over the period of the next three years. Use the Internet or other reliable resources to determine how much money you will need to invest today in a certificate of deposit (CD), earning 5 percent interest, per annum to have $13,000 for the replacement of your dishmachine in the next three years. For this option you will need to calculate the present value amount of $13,000 on an investment that earns 5% per year for three years.
•For buying the dishmachine through the vendor’s credit payment plan, you would be charged 11 percent interest over three years on the $11,000 cost of the dishmachine while making monthly installment payments. For this option you will need to calculate the total future amount that will be paid based on an initial amount of $11,000 for the dishmachine and 11% interest for the duration of the loan which is three years.
•Analyze the monthly payments, total cost, total interest paid, working capital considerations, PV, and FV elements to consider in this financial decision.

Please remember to include this in your submittal: Compare the $13,000 saved in the CD with the total cost for the vendor’s credit payment plan in your discussion analysis below and state which is more advantageous as a method of purchase and why.

Create an analysis document that presents the calculations you made for the financial decision. This document should also highlight the rationale you used to make the choice. Follow MLA standards for writing the document and citing sources. Write your analysis in Microsoft Word and name it W1_A2_lastname_firstname.doc.

Submit the document to this Discussion Area.

Use this Discussion Area to comment on the assignments submitted by at least two of your peers.

Assignment 2 Grading Criteria
Maximum Points

Calculated the amount to be invested in the CD and analyzed the financial decision of buying the dishmachine directly after three years.
10

Analyzed the financial decision of buying the dishmachine through the vendor’s credit payment plan with appropriate calculations.
10

Provided rationale of rejecting or choosing the given option.
10

Commented on the assignments submitted by at least two of your peers.
10

Total:
40