Consider the following investment cash flows:
|
Year
|
Cash flow
|
|
0
|
$2,000
|
|
1
|
$2000
|
|
2
|
0
|
|
3
|
$1,500
|
|
4
|
$2,500
|
|
5
|
$4000
|
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 stream at the end of Year 5 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, involve discounting projected future cash flows.What factors must executives consider when choosing a discount rate to apply to forecasted cash flows?
Consider the following investment cash flows:
YearCash flow
0($1,000)
1$250
2$400
3$500
4$600
5$600
a. Expected return of investment measured in dollar terms if the opportunity cost rate is 10 percent
b. Provide explanation in economic terms of your answer
c. What is the return of investment measured in percentage terms
d. Should this investment be made? Explain your answer