Investment Payback Calculation For Healthcare Financial Mana

Investment Payback Calculation healthare Financial Manage

Assignment "Investment Payback Calculation" Healthcare Financial Management Investment Payback Calculation Submit written responses to these questions. What is the difference between simple interest and compound interest? What is the future value of $10,000 with an interest rate of 16 percent and one annual period of compounding? With an annual interest rate of 16 percent and two semiannual periods of compounding? With an annual interest rate of 16 percent and four quarterly periods of compounding? What is the relationship between the present value factor and future value factor? Compare the results of the present value of a $6,000 ordinary annuity at 10 percent interest for 10 years with the present value of a $6,000 annuity due at 10 percent interest for 11 years. Explain the difference. If a nurse deposits $1,000 today in a bank account and the interests is compounded annually at 12 percent, what will be the value of this investment: Five years from now? Ten years from now? Fifteen years from now? Twenty years from now? Comment of the following statement. “When a not-for-profit facility receives a contribution from a member of the community, the cost of capital is inconsequential when deciding how to use this contribution, because it is, in effect, free money.” What are the primary drawbacks of the payback method as a capital budgeting technique? Explain why pro forma income statements adjust for depreciation expense when developing projected cash flows for a project. Will a decision that is based upon NPV ever change if it were based upon IRR instead? Why or why not?

Paper For Above instruction

The concepts of simple interest and compound interest form the foundation of financial mathematics. Simple interest is calculated only on the original principal amount throughout the investment period, whereas compound interest accumulates on both the initial principal and the accumulated interest from previous periods. This distinction means that compound interest generally yields higher returns over time due to the interest-on-interest effect, making it a more potent growth mechanism in finance (Brigham & Houston, 2016).

To understand the future value (FV) of an investment, the standard formula considers the principal, the interest rate, and the number of compounding periods. For a $10,000 investment at an annual interest rate of 16%, the FV after one year with annual compounding is calculated as FV = PV × (1 + r)^n, which results in FV = $10,000 × (1 + 0.16)^1 = $11,600. When interest is compounded semiannually (two periods per year), the interest rate per period becomes 8%, and the number of periods doubles to 2, yielding FV = $10,000 × (1 + 0.08)^2 = $11,662.40. For quarterly compounding (four periods per year), the interest per quarter is 4%, and there are four periods, leading to FV = $10,000 × (1 + 0.04)^4 = $11,696.32 (Ross, Westerfield, & Jaffe, 2016).

The relationship between the present value (PV) factor and the future value (FV) factor aligns with the concept of discounting and compounding. The PV factor is used to determine present value based on future cash flows, discounted at a specific rate, whereas the FV factor compounds present value to project future amounts. Mathematically, PV factor = 1 / (1 + r)^n, and FV factor = (1 + r)^n. These are inverses; multiplying a present value by the PV factor discounts it back to today, while multiplying by FV factor projects it forward (Brealey, Myers, & Allen, 2017).

Comparing the present value of a $6,000 ordinary annuity over 10 years at 10% interest with the present value of a $6,000 annuity due over 11 years at the same rate reveals differences attributable to timing and the inclusion of an additional period. An ordinary annuity’s payments occur at the end of each period, resulting in a lower present value, while an annuity due’s payments occur at the beginning, which increases their present value because of the immediate payment advantage. The extra year in the annuity due accounts for an additional period of discounting, leading to higher valuation (Mitchell, 2011).

A nurse depositing $1,000 in a bank at 12% interest compounded annually will see the value of the deposit grow as follows: after five years, the amount is $1,000 × (1 + 0.12)^5 ≈ $1,762.34; after ten years, ≈ $3,105.85; after fifteen years, ≈ $5,491.34; and after twenty years, ≈ $9,718.61. This growth underscores the power of compound interest over extended periods (Higgins, 2012).

The statement, “When a not-for-profit facility receives a contribution from a community member, the cost of capital is inconsequential because it is free money,” warrants scrutiny. While donations do not impose direct capital costs, the opportunity cost of deploying those funds must be considered. The prioritization of projects often hinges on the potential return or societal benefit, even when the source is non-repayable. Ignoring the cost of capital may lead to suboptimal resource allocation, emphasizing the importance of strategic financial planning (Harper & Allegrante, 2020).

The primary drawbacks of the payback method as a capital budgeting tool include its failure to consider cash flows beyond the payback period and its disregard for the time value of money. Consequently, it may favor projects with quick payback despite lower overall profitability or strategic fit. This method also neglects the risk factors associated with long-term investments, potentially leading to misleading conclusions about project viability (San Cristobal, 2018).

Pro forma income statements adjust for depreciation because it is a non-cash expense that reduces accounting income but does not impact cash flows. For cash flow projections, depreciation is added back because it does not represent an actual outflow of cash, yet it affects taxable income and thus taxes paid. Adjusting for depreciation ensures that projections reflect the true cash-generating capacity of the project (Ross et al., 2016).

Decisions based on Net Present Value (NPV) and Internal Rate of Return (IRR) are closely related; however, they can differ, especially with non-conventional cash flows or multiple IRRs, leading to differing recommendations. While NPV provides an absolute measure of value added, IRR offers a percentage return. In most cases, if a project’s NPV is positive at a specified discount rate, the IRR will be above that rate. Yet, conflicts may arise in complex scenarios where the IRR rule may lead to incorrect decisions, highlighting the importance of understanding each metric’s limitations (Brealey et al., 2017).

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
• Brigham, E. F., & Houston, J. F. (2016). Fundamentals of Financial Management (13th Ed.). Cengage Learning.
• Harper, S. R., & Allegrante, J. P. (2020). Strategic Financial Management in Healthcare. Journal of Healthcare Finance, 46(3), 1-9.
• Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill Education.
• Mitchell, S. (2011). Financial Management: Principles and Applications. John Wiley & Sons.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance (11th ed.). McGraw-Hill Education.
• San Cristobal, R. (2018). Capital Budgeting and Investment Analysis. Financial Analysts Journal, 74(4), 35-45.