Case Study - Planning Ahead Precision Machining Corporation has been growing steadily over the past decade. Demand for the companys products continues to rise, so management has decided to expand the production facility; $2,600,000 has been set aside for this over the next four years. Management has developed two different plans for expanding over the next four years: Plan A and Plan B. Plan A would require equal amounts of $700,000, now, one year from now, two years from now, and four years from now. Plan B would require $300,000 now, $730,000 one year from now, $900,000 two years from now, and $975,000 four years from now. The company has decided to fund the expansion with only the $2,600,000 and any interest it can earn on it. Before deciding which plan to use, the company asks its treasurer to predict the rates of interest it can earn on the $2,600,000. The treasurer expects that Precision Machining Corporation can invest the $2,600,000 and earn interest at a rate of 4.5% p.a. compounded semi-annually during Year 1, 5.0% p.a. compounded semi-annually during Years 2 and 3, and 5.5% p.a. compounded semi-annually during Year 4. The company can withdraw part of the money from this investment at any time without penalty. a. Could Precision Machining Corporation meet the cash requirement of Plan A by investing the $2,600,000 as described above? (Use now as the focal date.) b. What is the exact difference between the cash required and the cash available from the investment? c. Could Precision Machining Corporation meet the cash requirement of Plan B by investing the $2,600,000 as described above? (Use now as the focal date.) d. What is the exact difference between the cash required and the cash available from the investment

a. Suppose Plan A was changed so that it required equal amounts of $700,000 one year from now, two years from now, three years from now and four years from now. Could Precision Machining Corporation meet the cash requirements of the new Plan A by investing the $2,600,000 as described above? (Use now as the focal date.) b. What is the difference between the cash required and the cash available from the investment?

Suppose the treasurer found another way to invest the $2,600,000 that earned interest at a rate of 5.4% compounded quarterly for the next five years. a. Could the company meet the cash requirements of the original Plan A with this new investment? (Show all your calculations.) b. Could the company meet the cash requirements of Plan B with this new investment? (Show all your calculations.) c. If the company could meet the cash requirements of both plans, which plan would the treasurer recommend? In other words, which plan would have the lower present value?