Ha 520

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 year

• b. The future value of $500 invested at 8 percent for five years

• c. The present 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

9.4 Find the following values assuming a regular, or ordinary, annuity:

a. the present value of $400 per year for ten years at 10 percent

b. the future value of $400 dollars for ten years at 10 percent

c. the present value of $200 dollars per year for five years at 5 percent

d. the future value of $200 dollars per year for five years.

9.6 Consider the following uneven cash flow stream:

Year Cash Flow

0 $ 0

1 250

2 400

3 500

4 600

5 600

a. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?

b. Add an outflow (or cost) of $1,000 at year 0. What is the present value (or net present value) of the stream?

9.7 Consider an uneven cash flow stream

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

b. What is the value of the cash flow steam at the end of Year 5 if the cash flows are invested in a accounty that pay 10 percent annually?

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).

d. Time value analysis involves either discounting or compounding case 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?

Year Cash flow

0 $2000

1 2000

2 0

3 1,500

4 2,500

5 4,000

9.9 Assume that you just won $35 million in the Florida lottery, and hence the state will pay you 20 annual payments of $1.75 million each beginning immediately. If the rate of return on securities of similar risk to the lottery earnings (e.g., the rate on 20-year U.S. Treasury bonds) is 6 percent, what is the present value of your winnings?