Since the construction industry is notorious for having slumps in the course of business where operational cash flow is constrained, Ms. Sims has decided to put aside $15,000 a month from profits for the next five years as a safety net for recessionary periods. The money will be set aside in a separate account which pays 3.25% annual interest compounded monthly. The first $15,000 is placed in the account today.
Activity: Compute how much this account will contain after 5 years.
You know that the board of directors will have questions for Sue to answer and to place this in context of Sue’s recommendations and potential impact to the company you should prepare answers for her based on your research and conversations with Sue. Here are some of the questions the board may ask:
Isn’t this money an opportunity cost to the company?
Would you recommend using company profits in this manner? Are there better options here to manage the volatility of sales?
Explain and support your answers since Sue is counting on you to prepare her for this board meeting.