Question: Time Value of Money, Textbook healthcare finance 6th edition L Gapenski & K Reiter (2016)
a. What would be future value of $1,000 invested at 5% annually for eight years (assuming annual compounding)?
b. What would be future value of a $1,000 invested at 5% annually for eight years (assuming semi-annual compounding)?
c. If there a difference between the results in questions 1 and 2 above? If so, explain the reason for this difference.
d. What is the PRESENT VALUE of the cash flows listed below and the RETURN on the investment (in percentage terms), if we assume discount rates of 8 and 12%?
|
Year
|
Cash Flow
|
|
0
|
(200,000)
|
|
1
|
20,000
|
|
2
|
45,000
|
|
3
|
20,000
|
|
4
|
25,000
|
|
5
|
40,000
|
|
6
|
40,000
|
|
7
|
56,000
|
|
8
|
50,000
|
|
9
|
50,000
|
|
10
|
68,000
|
e. Given the table below and assuming a 12% discount rate for each project:
|
Year
|
Project X
|
Project Y
|
|
0
|
(10,000)
|
(10,000)
|
|
1
|
6,500
|
1000
|
|
2
|
3,000
|
3,000
|
|
3
|
3,000
|
3,000
|
|
4
|
1,000
|
6,500
|
i. Calculate the NPV for each project
ii. These are very similar cash flows, but can you explain why the NPV for each project is different?
iii. What do you expect the IRR for each project to be with respect to the NPV? Explain your answer.
iv. Which project would you recommend for implementation and why?