# chapter 9 3

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 ve years

c. The present value of $500 to be received in one year when the op-

portunity cost rate is 8 percent

d. The present value of $500 to be received in five years when the op-

portunity cost rate is 8 percent

9.2 Repeat Problem 9.1 above, but assume the following compounding

conditions:

9.7 Consider another uneven cash ow stream:

Year Cash Flow

0 $2,000

1 2,000

2 0

3 1,500

4 2,500

5 4,000

a. What is the present (Year 0) value of the cash flow stream if the op-

portunity cost rate is 10 percent?

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 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

cash flows. Many healthcare financial management decisions—such

as bond refunding, capital investment, and lease versus buy—involvediscounting projected future cash flows. What factors must execu-

tives 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

a. What is the return expected on this investment measured in dollar

terms if the opportunity cost rate is 10 percent?

b. Provide an explanation, in economic terms, of your answer.

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

d. Should this investment be made? Explain your answer.a. Semiannual

b. Quarterly