ECON 106F Lecture Notes - Lecture 4: Net Present Value, Cash Flow, 0 (Year)

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ivorykangaroo452

26 Apr 2016

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Ch 4 lecture: the time value of money. The first cash flow is now at date 0 (today) and is represented as a negative sum because it is an outflow. Timelines can represent cash flows that take place at the end of any time period (like month, week, day etc) Financial decisions often require combining cash flows or comparing values- three rules govern this process: only values at the same point in time can be compared or combined. So you have to look at either the present or future values of these numbers. You need to put all of these numbers in terms of money in 3 years o. To move a cash flow forward in time, you must compound it. You have to multiply the amount in the bank by 1 + r for every period and that gets you a new amount in the bank. To move a cash flow backward in time, you must discount it.

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You are considering two investment options. In option A, you have to invest $4500 now and $800 three years from now. In option B, you have to invest $4000 now, $1200 a year from now, and $1000 three years from now. In both options, you will receive four annual payments of $1800 each. (You will get first payment a year from now) What is the present worth of option A and B. Which of these options would you choose based on the present worth criterion, assuming 8% interest? Assume that all cash flows occur at the end of a year.

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Healthcare Financial Management and Economics Week 10 Assignment Capital Budgeting -

There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry. Use the Week 10 Assignment Capital Budget Excel Template to show your work, answer the following questions:

1. If a physician deposits $19,000 today into a mutual fund that is expected to grow at an annual rate of 8%, what will be the value of this investment: a. 3 years from now b. 6 years from now c. 9 years from now d. 12 years from now.

2. The Chief Financial Officer of a hospital needs to determine the present value of $140,000 investment received at the end of year 5. What is the present value if the discount rate is: a. 3% b. 6% c. 9% d. 12% .

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1. What is the capitalized value of an infinite series of $1,000 biennial (every two years) payments? MARR = 10%

		$4,950
		$4,025
	.	$4,350
		$4,762

2. Frank West Enterpises would like to choose one of the following plans for expansion. Using present worth analysis, find the best alternative among the three alternatives and the Do-Nothing.

	Alt. A	Alt. B	Alt. C
Initial Cost	$10,000	$21,000	$8,000
EUAB	$6,000	$7,000	$4,000
EUAC	$1,500	$1,000	$2,000
Salvage Value	$2,000	$8,000	$3,000
Life	2 Years	3 Years	2 Years

Use a MARR of 10%.

	.	Do-Nothing
	.	Alt. C
	.	Alt. B
	.	Alt. A

U. S. Engineering is investigating the possibility of acquiring new automated packaging equipment at a cost of $12,000. It is expected that the equipment will have a salvage value of $1,000 at the end of its useful life of 10 years. It is determined by the plant engineering department at the company that the operation and maintenance cost will be $500 in the first year and will gradually increase every year starting year 2 at the rate of $50 until the equipment is retired. Determine the equivalent uniform annual cost (EUAC) if MARR for the company is 10%.

		$2,575.95
		$2,150.50
	.	$2,176.60
	.	$2,184.40

The cash flows given in table below are for two different alternatives. MARR =10%

Data	C	D
Initial Cost	$20,000	$80,000
Uniform Annual Benefits	$6,000	$10,000
Salvage Value	$5,000	$20,000
Useful Life in years	5	infinity

The equivalent uniform annual worth (EUAW) of alternative N is ______________.

Hint: Assume the Salvage Value is never realized since N is infinite.

		$2,000
		$1,920
		$1,762
		$2,476

Compare the following plans using a MARR of 6%.

Data	Plan X	Plan Y
Equipment First Cost	$50,000	$75,000
Annual Operation & Maintenance Cost	$3,000	$2,500
Salvage Value	$10,000	$0
Service Life, Years)	25	50

		$6,728; $7,255
		$7,255; $9,000
	.	$6,728; $7,728
	.	$6,728; $8,200

LAEP, Inc. wants to evaluate two methods of shipping their products. The following cash flows are associated with each alternative:

Data	Method
	A	B
Life (Years)	10	10
First Cost	$700,000	$1,512,000
M&O Cost	$18,000	$9,000
M&O Cost Gradient	$900	$775
Annual Benefit	$154,000	$303,000
Salvage Value	$142,000	$210,000

Annual profits are based on amount of products which can ordinarily be shipped each year as a function of the amount of vehicles or service purchased with the first cost and the M&O costs.

Using a MARR of 15%, calculate the equivalent uniform annual cash flow (EUAB - EUAC) for each alternative.

Determine the most desirable alternative based on the results.

		$389.57, $445.90; Method A
		$445.90, $389.57; Method A
	.	$445.90, $389.57; Method B
	.	$389.57, $445.90; Method B

For the cash flow diagram shown, which of the following equations properly calculates the uniform equivalent (A)?

n	0	3	6	9	12	15
Dollars	$100	$100	$100	$100	$100	$100

		A=100(A/P,i,15)+ 100(A/F,i,3)
		A=100(A/P,i,15)
		A=100(A/F,i,3) + 100(A/F,i,15)
		A=100(A/P,i,3) + 100(A/F,i,3)

Three different alternatives shown in table below are being considered by U. S. Engineering systems.

Assume that alternatives X and Z are replaced at the end of their lives.

Data	Alternative X	Alternative Y	Alternative Z
Initial Cost	$6,000	$1,000	$1,500
Uniform Annual Benefits	$810	$125	$ 230
Useful Life in Years	20	infinite	10
MARR	12%

The NPW for alternative

ECON 106F Lecture Notes - Lecture 4: Net Present Value, Cash Flow, 0 (Year)

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