| Course | FIN 5003 Financial Decision Making |
|---|---|
| Module | Module 1 |
| Paper type | Time value comparison paper |
| Length | 1,210 words, about 4 pages plus title and reference pages |
| Format | APA 7 student paper |
| School | American College of Education |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for FIN 5003 Module 1
A $54.7 Million System That Costs Less Than a $34.6 Million One? Dating the Cash Flows of Two Refrigeration Systems and Comparing Them Fairly
Student Name
American College of Education
FIN5003: Financial Decision Making
Module 1 Assignment
Instructor Name
July 3, 2028
The Decision
Fenwick Cold Chain, a composite regional operator of refrigerated warehouses invented for this course, is building a 40,000-pallet freezer facility to serve a frozen food manufacturer under a long-term contract. The building's refrigeration system must be chosen before the design is finished. Option A is an ammonia system, the long-standing standard for large freezers, costing $6.8 million installed with an expected life of 25 years. Option B is a transcritical carbon dioxide system, costing $8.1 million installed with an expected life of 20 years, but using less energy in Fenwick's cool northern climate and qualifying for a utility efficiency rebate.
The engineering team has summed each system's lifetime costs: about $54.7 million for ammonia and $34.6 million for carbon dioxide. Those totals are meaningless for a decision, because they add dollars paid today to dollars paid 25 years from now and compare a 25-year system with a 20-year one. A dollar has a date, and two dollars with different dates are not the same amount of money.
The Cash Flows and Their Dates
Each option's cash flows were listed with the date on which they occur. Ammonia: $6.8 million at installation, year 0; energy of about $1.10 million in the first year of operation, rising 3 percent a year with expected electricity prices; maintenance of $180,000 in the first year, also rising 3 percent; and a compressor overhaul of $1.2 million in year 12. Carbon dioxide: $8.1 million at installation; energy of about $0.86 million in the first year, rising 3 percent; maintenance of $150,000, rising 3 percent; and a utility rebate of $600,000, paid at the end of the first year of operation after the savings are verified.
Two conventions matter. First, energy and maintenance are paid monthly, not in a lump at year-end, so each year's costs are dated at the middle of the year, a close approximation to monthly payments. Second, all figures are nominal, including expected price increases, so they are discounted at a nominal rate. Mixing nominal cash flows with a real discount rate, or the reverse, is an easy way to distort any comparison that spans decades; Fisher (1930) set out the relationship between nominal and real interest rates that makes the two approaches consistent when applied correctly.
Discounting to the Present
Fenwick's finance team uses a discount rate of 8 percent for cost comparisons of this kind; the next module examines how that rate should be set. Discounting each cash flow to year 0, the ammonia system's present value of costs is about $25.75 million: $6.80 million of purchase, about $15.87 million of energy, about $2.60 million of maintenance and about $0.48 million for the overhaul. The carbon dioxide system's present value of costs is about $20.40 million: $8.10 million of purchase, about $10.95 million of energy and about $1.91 million of maintenance, less about $0.56 million for the rebate.
Discounting shrinks the comparison dramatically. The undiscounted difference of about $20 million becomes a present value difference of about $5.3 million, because much of the ammonia system's extra energy spending falls in distant years, which count for less today. But the two present values still cannot be compared directly: the ammonia figure covers 25 years of refrigeration and the carbon dioxide figure only 20.
Equal Footing: Equivalent Annual Cost
To compare options with different lives, each present value is converted into an equivalent annual cost, the constant annual payment over the option's life that has the same present value. In practice, the present value is divided by the present value of one dollar a year over the same life at the same rate. At 8 percent, the ammonia system's equivalent annual cost is about $2.41 million over 25 years, and the carbon dioxide system's is about $2.08 million over 20 years. The carbon dioxide system is cheaper by about $334,000 a year in equivalent terms.
The method assumes that each system would be replaced at the end of its life with a similar one, so that the comparison is between two ways of providing refrigeration indefinitely. Fenwick's contract with the frozen food manufacturer runs 15 years with renewal options, and the building is designed for at least 40 years of use, so that assumption is reasonable. Brealey et al. (2023) describe equivalent annual cost as the standard tool for choosing between machines with unequal lives, with the caution that it depends on this replacement assumption.
Does the Timing Convention Matter?
The team tested the mid-year convention against the simpler end-of-year convention. For the ammonia system, treating each year's energy and maintenance as paid at year-end lowers the present value of costs by about $0.7 million, from about $25.75 million to about $25.05 million, because discounting each payment for an extra half year makes it smaller. The same shift applies to the carbon dioxide system in proportion, so the ranking does not change. But the $0.7 million difference is larger than many of the other judgment calls in the analysis, which shows that dating cash flows is not a technicality.
The comparison also passed a survey of practice: Graham and Harvey (2001) found that most chief financial officers they surveyed always or almost always relied on discounted cash flow tools, NPV and IRR above all, when budgeting capital, the methods built on the time value principles applied here.
What the Numbers Do Not Capture
Some differences between the systems are not in the cash flows. Ammonia is toxic, and a freezer system of this size holds far more than the 10,000-pound threshold at which federal process safety management and risk management program rules apply, requiring written hazard analyses, operating procedures, mechanical integrity programs, audits and emergency planning. Fenwick already runs these programs at its existing sites, so the added administrative cost is modest, but a release would put workers and neighbors at risk. Carbon dioxide is not toxic in the same way, though it operates at very high pressures and can displace oxygen in enclosed spaces, which requires its own detection and ventilation. Neither risk is costless, and the safety manager should assign a cost to each program before the final decision.
Two further considerations favor carbon dioxide modestly. Technicians experienced with transcritical systems are fewer than those trained on ammonia, which could raise maintenance costs above the estimate in the early years. But the frozen food customer has asked its warehouse providers to report refrigerant choices as part of its environmental commitments, and a system with a lower safety and environmental profile may help Fenwick retain the contract at renewal. Neither consideration reverses the financial result; both should be noted in the decision record.
Recommendation
On a properly dated and comparable basis, the carbon dioxide system costs about $334,000 a year less than the ammonia system, a present value advantage of more than $3 million over a 25-year horizon when replacement is accounted for. Fenwick should select the carbon dioxide system, subject to two checks the next modules will address: whether 8 percent is the right discount rate for this decision, and how sensitive the result is to electricity prices, which drive most of the difference.
References
Brealey, R. A., Myers, S. C., & Allen, F. (2023). Principles of corporate finance (14th ed.). McGraw Hill.
Fisher, I. (1930). The theory of interest. Macmillan.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
The FIN 5003 Module 1 assignment instructions
FIN 5003 opens with the time value of money, and Module 1 often asks you to compare options whose cash flows occur at different times. Most prompts expect the decision stated, every cash flow listed with its date, discounting at an appropriate rate, a method for comparing options with different lives, a test of assumptions and a recommendation. Many sections ask you to explain why undiscounted totals mislead. The comparison paper usually runs five pages with a cash flow table. The FIN 5003 Canvas instructions note the discount rate to use and whether cash flows should be nominal or real. List every cash flow with its date and growth assumption before discounting anything.
Inside the FIN 5003 Module 1 example
The paper opens with the decision: replace a warehouse refrigeration system with either a cheaper conventional system or a costlier efficient one, and the misleading undiscounted totals. The cash flow section lists purchase, installation, energy, maintenance and replacement for each system, with dates and energy price growth, and states the timing convention used. The discounting section brings each flow to the present at the company's rate and shows the efficient system's lower present cost. Because the systems last different lengths of time, the equal footing section converts each to an equivalent annual cost. A section tests whether mid-year or end-of-year timing changes the answer. A section names factors such as reliability and refrigerant rules, and the recommendation follows.
FIN 5003 Module 1 rubric: what full marks look like
Time value papers in the MBA are graded on correctness and fairness of comparison. Cash flow credit requires every amount dated with its assumptions. Discounting marks reward correct present values at a stated rate, with nominal or real flows matched to the rate. The equal footing row usually carries significant weight: equivalent annual cost or a common horizon used when lives differ. Graders give credit for testing a convention, such as timing, and reporting whether it matters. Marks for qualitative factors go to specific items the numbers miss. The last FIN 5003 marks go to a recommendation, a cash flow table and APA 7. Reviewers look for a discount rate stated once and used consistently.
FIN 5003 Module 1 help: mistakes that cost points
Time value papers most often compare undiscounted totals. Another frequent weakness is mixing nominal cash flows with a real discount rate. Students also compare options with different lives over different horizons. Date every flow. Match flows to the rate. Use equivalent annual cost when lives differ. Test one convention. Name what the numbers leave out. Show the discounting in a table a reader can check. If your comparison involves leasing versus buying, two equipment options or two contracts, the desk can draft a time value comparison for it. State whether energy prices are assumed to grow and by how much, since that drives the answer.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official American College of Education document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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FIN 5003 Module 1 questions, answered
When should I use equivalent annual cost?
Use it when comparing options with different lives that would each be replaced at the end of their life. Convert each option's present value to a constant annual amount over its own life and compare the annual amounts.
Should cash flows be nominal or real?
Either can work, but they must match the discount rate. Nominal cash flows that include inflation are discounted at a nominal rate; real cash flows are discounted at a real rate. Mixing them produces errors.
Where can I find a free FIN 5003 Module 1 sample paper?
Right here. The time value comparison paper for FIN 5003 Module 1 runs from "The Decision" to "Recommendation", with notes beside each part.
Why do undiscounted totals mislead?
They treat a dollar paid in year fifteen the same as a dollar paid today. Discounting reflects the return money could earn in the meantime, which often reverses which option looks cheaper.
What is the time value of money?
It is the idea that money available now is worth more than the same amount later, because it can be invested to earn a return. Discounting converts future amounts into today's value.