Pensacola Surgery Center
Time Value Analysis
A Case Study in Healthcare Finance
Catherine Grace Bautista
1. Consider the $50,000 excess cash. Assume that Gary invests the funds in one-year CD.
a. What is the CD’s value at maturity (future value) if it pays 10 percent annual interest?
FV = PV x (1+i)n
FV = 50,000 x (1+10%)1
FV = 50,000 x 1.10
FV = $55,000 at maturity after a year
b. What will its future value be if the CD pays 5 percent interest? If it pays 15 percent interest?
@ 5% per annum
FV = PV x (1+i)n
FV = 50,000 x (1+5%)1
FV = 50,000 x 1.05
FV = 52,500 at maturity after a year
@15% per annum
FV = PV x (1+i)n
FV = 50,000 x (1+15%)1
FV = 50,000 x 1.15
FV = 57,500 at maturity after a year
c. BankSouth offers CDs with 10
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What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested? R=14.87% FV = PV x (1 + i)n $200,000 = $100,000 x (1 + .1487)5 $200,000 = $100,000 x 2.0000 FV $200,000 = $200,000
4. Now consider a second alternative for accumulating funds to buy the new billing system. In lieu of a lump sum investment, assume that five annual payments of $32,000 are made at the end of each year.
a. What type of annuity is this?
This would be considered an ordinary annuity. An ordinary annuity is defined as a series of equal payments made at the end of each period over a fixed amount of time. Payments in an annuity can be made as frequently as every week. However, in practice ordinary annuity payments are made monthly, quarterly, semiannually, or annually. An example of an ordinary annuity would be straight bond coupon payments.
b. What is the present value of this annuity if the opportunity cost rate is 10% annually? 10% compounded semiannually?
10 percent
Year Amount PV formula PV factor
1 $32,000 1 /(1+.10)1 0.9091
2 $32,000 1 /(1+.10)2 0.8264
3 $32,000 1 /(1+.10)3 0.7513
4 $32,000 1 /(1+.10)4 0.6830
5 $32,000 1 /(1+.10)5 0.6209 3.7908
PV = $32,000 x 3.7908 = $121,305 (annually)
10.25 percent
Year
Solving for r in the above equation we get 14.318% as the effective interest rate.
1- She takes the cash bonus and decide to invest it in a 5-year bond which rate is 6,02%.
a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?
B. The present value of an annuity is unaffected by the number of the annuity payments.
a. Starting with $20,000, how much will you have in 20 years if you can earn 5% on your money?
10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?
4. Now focus solely on the expected profitability of the proposed marketing program. How many incremental daily visits must the program generate to make it worthwhile? (In other words, how many incremental visits would it take to pay for the marketing program, irrespective of overall clinic
The interest rate of a term deposit is at 5.2% per annum. Available investment fund is $200,000. Term Deposit will yield $10,400 p.a. by using $200,000 multiply by 5.2%. However, for compounded interest rate, 5 years investment will be $257,697 (ROI = $57,697). And 10 years investment will be $332,038 (ROI = $132,038), assume that the interest rate is constant within 10 years period. The risk is considered minimal.
A. The interest rate to use is the nominal rate, assets are the discounted sum of their future values, and expected
The future value equation is written as: Future Value= Present Value (1+ interest rate) ^years. The year value is written as an exponent. In this case, Granny wants to invest her $25,000 for 18 years at the 1.72 rate five year CD rate. For the purposes of this exercise, the grandchild will start school in eighteen years, but the assumption will be that the 1.72 rate is constant over that period.
2. (Q. 6 in B) What is the present value of a four-year annuity of $100 per year
If Ellen could earn 12% on her money by placing it in a savings account, should she place it instead in any of the annuities? Which ones, if any? Why?
Therefore, if Joe continues to invest $5,000 annually ($416.67 monthly) into his saving account for the next 25 years, his investment, assuming a current balance of $5,000 compounded daily at 0.01% (as currently being offered by WellsFargo), will amount to about $130,170 . Now, Joe has also invested in certificate of deposits (CDs). He reported as simply having been reinvesting his original $5,000 for the past six years. Assuming a stated 0.30% interest rate on a two year CD with daily compounding, his $5,000 investment is now worth about $5,091 . However, he seeks to reinvest this until retirement. Performing similar calculations, we obtain a grand total of $5,488 . This is what his CD would amount to if he were to reinvest for the next 25 years.
Perpetual Cash Flows What is the value of an investment that pays $7,500 every other year forever, if the first payment occurs one year from today and the discount rate is 11 percent compounded daily?