Time Value Analysis - Pensacola Surgery Center Case 12

Cases in Healthcare Finance - Louis C. Gapenski

3. Now consider the surgery centers' goal of having $200,00 available in five years to buy new patient billing system.

a. What lump sum amount must be invested today in a CD paying 10 percent annual interest to accumulate the needed $200,000?

b. What annual interest rate is needed to produce $200,000 after 5 years if only $100,00 is invested?

4. Now consider a second alternative for accumulating funds to buy the new billing system. In lieu of a lump sum investment, assume that five annual payments of $32,000 are made at the end of each year.

a. Waht type of annuity is this?

b. What is the present value of this annuity if the opportunity cost rate is 10 percent annually? 10 percent compounded semiannually?

c. What is the future value of this annuity if the payments are invested in an account that pays 10 percent interest annually? 10 percent compounded semiannually?

f. Suppose the payments are only $16,000 each, but they are made every six months, starting six months from now. What will the future value be if the ten payments were invested at 10 percent annual interest? If invested at BankSouth at 10 percent compounded semiannually?

,000 600,000 What is each project's IRR? a. What is each project's NPV if the opportunity cost of capital is 10 percent: 5 percent? 15 percent? Capital Healthplans inc. is evaluating two different methods for providing home health services to it's members. Both methods involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. Therefore, the net cash flows for the decision are all outflows. Here are the project- ed flows:Gepenski's Fundamentals of Healthcare Finance 280 Method B ($) Year Method A ($) CHA (300,000) (120,000) (66,000) (96,000) (96,000) N (66,000) PR (66,000) (96,000) (66,000) (96,000) (66,000) (96,000) W 4 What is each alternative's IRR? If the opportunity cost of capital for both methods is 9 percent, which method should be chosen? Why? 9.6 Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments - project X and project Y. Each project requires a net investment outlay of $10,000, and the opportunity cost of capital for each project is 12 percent. The projects' expected net cash flows are as follows