Principles And Applications Of The Financial Management Assignment

Principles And Applications Of The Financial Management - Assignment Example 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 percent 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 considerat ion. 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 percent 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 percent (11% minus 7%). If the building is constructed in 2017 the estimated value to construct it would be $4,415,252. See Table 2 for additional information. Computation of Value of Building in 2017 Year Amount Rate Value 2013 4,000,000 2.50% 4,000,000 2014 4,000,000 2.50% 4100000 2015 4100000 2.50% 4202500 2016 4202500 2.50% 4307563 2017 4307563 2.50% 4415252 Increase in value       415,252 Table 2 The table indicates that the change in value represents an increase of $415,252. Based on the interest calculated in Table 1 this would suggest that if the $4,000,000 was invested enough interest would be earned to cover the expected increase in the value o f the building.