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Axia Material

Time Value of Money

Resource: Ch. 12, 12-A, & 12-C of Health Care Finance

Part I: Complete the following table by inserting your responses to the questions. Cite any sources you use.

|Define the time value of money. |AS the worth of money which is received after some specific period can not be equal to the worth of money |

| |today, therefore the time value of money concept is used to determine the present value of future cash flows |

| |or to find future value of present cash flows at a specified rate. |

|Provide a real-world example for the time |Jean will receive $8,500 per year for the next 15 years from her trust. If a 7% interest rate is applied, |

|value of money. |what is the current value of the future payments |

| |Present value of annuity formula = PMT x (1-(1/1+r^n)/r) |

| |Pv OF ANNUITY = 8500 *1-1/1.07^15/.07 = 8500*9.108 = 77417 |

|Why is time such an important factor in |If you receive cash today and if it is received in future, it has different values. The 100000 received |

|financial matters? |after one year is not equal to today’s 100000 due to discount rate, which can be inflation rate or interest |

| |rate. To decide which option is better either to receive cash today or in future, depends on the worth of |

| |future payment than today’s payment. If present value or worth of future payment is more than today’s |

| |payment it should be accepted otherwise today’s cash is better than future payments. |

| | |

|How would you use the time value of money to | |

|your financial benefit? |When some money is put into retirement benefit plan at some specific rate of interest, what amount will be |

| |reeived at the time of retirement is calculated by using time value of money. |

Part II: Complete the following table by calculating the ratios.

Present Value

|Amount |Compounding period |Rate of interest |Present value |

|$100,000 |Annual |6% for 10 years |55839.47 |

|$70,000 |Annual |4% for 15 years |38868.52 |

Internal Rate of Return

|Initial cost of investment |Periods of useful |Estimated annual net cash inflow |Look-up table value |Rate of interest |

| |life |generated | | |

|$75,000 |10 |$10,190 |7.36 |6% |

|$56,000 |6 |$12,115 |4.62 |8% |

Payback Period: Assume there are no income taxes for both scenarios.

|Purchase price of |Period of |Annual revenue generated per |Operating costs associated |Depreciation expense per |Payback period result |

|equipment |useful life |year |with revenue |year | |

|$350,000 |10 years |$80,500 |$36,000 |$35,000 |7.87 years |

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