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Healthcare Finance Chp 9

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Chapter 9 Problems:
9.7
Consider another uneven cash flow stream:
a) What is the present (year 0) value of the cash flow stream if the opportunity cost rate is 10%?
Present value = $9136.37
b) What is the future (year 5) value of the cash flow stream if the cash flows are invested in an account that pays 10% annually?
Future Value: $14714.22
c) What 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).
Cash Flow today: $5282.05
d) 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 discounted projected future cash flows. What factors must executives consider when choosing a discount rate to apply to forecasted cash flows?
The challenge faced is to have appropriate level of debt and equity to reduce the overall cost of capital without jeopardizing the overall financial health of the firm.
9.8
a) What is the present value of a perpetuity of $100 per year if the appropriate discount rates is 7%?
Present value of perpetuity: 100/0.07 = $1429
b) Supposed that interest rates doubled in the economy and the appropriate discount rate is now 14%. What would happen to the present value of the perpetuity?
PV of perpetuity decreases due to the higher discount rate.
Present value of new perpetuity = 100/0.14= $714.50
9.11
Consider the Following investment cash flows:
a) What is the return expected on this investment measure in dollar terms if the opportunity cost rate is 10
Year Cash Flow (1) Discounting Factor (2) Presesnt Value (1)*(2)
0 -1,000 1 -1000
1 250 0.909090909 227.27
2 400 0.826446281 330.58
3 500 0.751314801 375.66
4 600 0.683013455 409.81
5 600 0.620921323

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