Financing Options

19 May No Comments

Financing Option

FIN/419

Financing Option

The best financial option to choose is one that will yield the highest amount of interest. High interest rates will give the company huge amounts of profit. As indicated on the excel file, investor 1 was to pay all the interest at rates of 8% at the end of the period of 5 years. The amount of interest he ended up paying totaled to $140,798.42 as indicated. This value was attained by multiplying the present value by interest rate and raising it to period of 5 years as shown below: Future value = $300000*(1+0.08) ^5 = $140,798.42.

On the other end, the second investor was paying at an interest rate of 8% within the first 4 years and then the final payment of interest during the fifth year. As indicated on the excel sheet, this investor was paying $24000 interest on an annual basis. The amount he was expected to pay on the fifth year totaled to $324,000. Adding the sum of money paid within the first four years with the money he would have paid on the fifth year would result in: (24000*4) +324,000= $420,000. For this investor, the total amount of interest which paid was equivalent to: (24,000*4=$96,000).

Comparing the two investors, the first investor was to pay a total of $440,798 within a period of five years which was to yield an interest of $ 140,798. On the other end, the second investor was to pay a total of $ 420,000 which yielded an interest of $ 96,000. Based on the above analysis, the first investor paid more interest as compared to the second investor. As a result, the best option would have been scenario#1.

A higher interest rate would be preferred since it earns the company more profit. The profit attained from this investor would have been used to expand business operations. Assuming the number of investors in the first scenario were around ten, Quality Restaurant would have generated a huge profit from its funds within a period of five years (Campbell and Viceira, 2002). Moreover, these profits may be used in increasing employee salaries as well as their wages. By doing so, the company will be aiming at empowering and increasing morale of its workers. Well paid employees are always motivated and work towards achieving goals and objectives of their companies.

Moreover, the first investor should have been chosen for his willingness to see the company progressing. Working with this investor may lead to other future benefits such as bringing more of his friend investors to our company. Moreover, the high interest gained from the first investor will have a positive impact on our company through increasing and maintaining our current ratio above 1.6. Current ratio above 1.6 indicates that a company is at a stable financial position hence creates a more room for outside investors. Based on the above analysis, business firms should be keen when selecting their investors. Before agreeing to an investment, managers should first analyze total interests to be gained from each investor. Investors offering a higher interest within an agreed period of time should be preferred (Davis and Steil, 2001).

References

Campbell, J. and Viceira, L. (2002). Strategic asset allocation. Oxford: Oxford University Press.

Davis, E. and Steil, B. (2001). Institutional investors. Cambridge, Mass.: MIT Press.




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