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Consider the $50,000 excess cash. Assume that Gary

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End of Year Net cash flow

1 12,000

2 14,000

3 2,000

4 16,000

5 20,000

1. Consider the $50,000 excess cash. Assume that Gary invests in funds in a one year CD.

A. What is the CD’s value at maturity(future Value) if it pays 10 percent annual interest?

B. What will its future value be if the CD pays 5 percent interest? If it pays 15 percent interest?

C. BankSouth offers CDs with 10 percent nominal slated interest, but compounded semiannually.

What is the effective annual rate on this CD?

What will the future value be after one year if $50,000 were invested?

D. 10 percent CD with daily compounding. What are the CD’s effective annual rate and its value at maturity one year from now if $50,000.00 is invested? Assume a 365 day year.

E. What rate would the bank have to offer to make its semiannual compounding Cd competitive with the other bank’s daily compounding CD?

2. Rework Parts a through d of question 1 assuming that each CD has a five year maturity.

3. Now consider the surgery centers goal of having $200,000 available in five years to buy a 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 five years if only $100,000 is invested?

4. The five annual payments of $32,000 are made at the end of the year.

A. What type of annuity is this?

B. What is present value if cost rate is 10 percent annually? If 10 percent compounded semiannually?

C. What is the future if 10 percent interest annually? 10 percent compounded semiannually?

D. What is the annual interest rate required to accumulate the $200,000 needed to make the purchase assuming a $32,000 annual payment?

E. What size annual payment is needed to accumulate $200,000 under annual compounding at 10 percent interest rate?

F. Payments are only $16,000 each but they are made every 6 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 Bank South at 10 percent compounded semiannually?

5. Assume now that the payments are made at the beginning of each period. Repeat the analysis in Question 4 from the lease agreement given in the case. The lease is 4 years.

6. Now consider the uneven cash flow streaming from the lease agreement given in the case.

A. What is the present value year value of the annual lease cash flows if the opportunity cost rate is 10 percent annually?

B. What is the future value of this cash flow stream at the end of year 5 if the cash flows are invested at 10 percent annually? What is the present value of this future value when discounted at 10 percent? What does this result indicate about the consistency inherent in time value analysis?

C. Does the office renovation and subsequent lease agreement appear to be a good investment for the company? Compare the cost of renovation with the present value of the lease payments. Use a 10 percent discounted rate for the analysis.

7. Now assume that it is five years later and the company is unable to accumulate the $200,000 needed to make the software purchase. It is forced to borrow the $200,000. The loan calls for repayment in equal annual installments over a four year period with the first payment due at the end of one year. Assuming that the company can borrow the funds at a 10 percent rate, what amount of interest and principal will be repaid at the end of each year of the loan?

Pensacola Surgery Centers, Time Value Analysis

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