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Chapter 9

9.1 Find the following values for a lump sum assuming annual compounding

A. The future value of $500 invested at 8 percent for one

B. The future value of $500 invested at 8 percent for five

C. The future value of $500 to be received in one year when the opportunity cost rate is 8 percent

D. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent

9.2 Repeat problem 9.1 but assume the following compounding conditions:

A. Semiannual

B. Quarterly

9.7 consider another uneven cash flow stream:

Year cash flow

0 $2,000

1 2,000

2 0

3 1,500

4 2,500

5 4,000

1. 1. What is the present (year 0) value of cash flow stream if the opportunity cost rate is 10 percent?

1. 1. What is the future (year 5) value of the cash flow stream if the cash flows are invested in an account that pays 10 percent annually?

1. 1. What is the cash flow today (year 0) in lieu of the $2,000 cash flow, would be needed to accumulate $20,000 at the end of year 5? ( assume that the cash flows for years 1 through 5 remain the same)

1. 1. Time value analysis involves either discounting or compounding cash flows. Many healthcare financial management decisions such as bond refunding, capital investment and lease versus buy involve discounting projected future cash flows. What factors must executives consider when choosing a discount rate to apply to forecasted cash flows?

9.11 consider the following investment cash flows

Year cash flow

0 ($1,000)

1 250

2 400

3 500

4 600

5 600

1. 1. What is the return expected on this investment measured in dollars terms if the opportunity cost rate is 10 percent?

1. 1. Provider an explanation in economic terms, of your answer

1. 1. What is the return on this investment measured in percentage terms?

1. 1. Should this investment be made? Explain your answer