Simple and compound interest calculations in healthcare finance

Healthcare Finance

What is the difference between simple interest and compound interest?

Simple interest is gauged on the basis of the loan's principal amount while the compound interest is derived on the basis of the principal amount and also the accumulated interest. Simple interest has been attained when one multiplies the principal amount with both interest rate as well as the payment period with in a loan. On the other hand, compound interest is derived when one multiplies the principal amount with one and add the resulting figure with the annual interest rate, which is elevated to the figure of compound periods subtracted by one (Horngren et al., 2012).

What is the formula for determining the future value of an amount?

The formula for calculating the future value of an amount is as follows:

Future Value = Present Value x (Future Value factor for n = number of years, i = certain percentage)

What is the future value of $10,000 for an interest rate of 16% and 1 annual period of compounding?

10,000 x ((1 + 0.16)1)

= $11,600

For an annual interest rate of 16% and 2 semi-annual periods of compounding?

10,000 x ((1 + 0.16)4-1)

10,000 x ((1 + 0.16)3)

= $15,608.96

For an annual interest rate of 16% and 4 quarterly periods of compounding?

10,000 x ((1 + 0.16)16-1)

10,000 x ((1 + 0.16)15)

= $92,655.21

4. Define an annuity

An annuity is defined as a fixed or predetermined amount of money that is paid to an individual every year, more often than not for the rest of his or her life.

5. In the future value annuity table at any interest rate for 1 year, why is the future value interest factor of this annuity equal to 1.00?

The values in the future value annuity table are generated by the formula:

FV = $1 ((1+i)^n - 1)/i if n = 1, that comes to be

FV = 1( 1+i)^1-1)/i

= 1( 1+i - 1)/i

= i/i

7. Explain the difference between a horizontal merger and a vertical merger

A horizontal merger is a merger that takes place between companies that operate within the same industry, more often than not competitors that offer the same goods or services. This is common in industries with minimal companies when competition becomes higher. On the other hand, a vertical merger is a merger that takes place between two companies that produce different goods or services for one particular finished product. More often than not a vertical merger takes place when two or more companies, operating at dissimilar levels within the supply chain of an industry, opt to merge their operations (Keat et al., 2013).

Professional Development Questions

8. Biogen, Inc. has a cost capital of 9%, and it has a project with the following cash flows. What is the NPV of this project?

Year 0-100,000 = 100,000 / ( 1 + 0.09)0 = 100,000

Year 1-20,000 = 20,000 / ( 1 + 0.09)1 = 18,348.62

Year 2-20,000 = 20,000 / ( 1 + 0.09)2 = 16,833.60

Year 3-100,000= 100,000 / ( 1 + 0.09)3 = 77,218.35

Year 4-150,000 = 150,000 / ( 1 + 0.09)4 = 106,263.78

Year 5-175,000 = 175,000 / ( 1 + 0.09)5 = 113,737.99

Therefore, the net present value of this project is $432,402.34

9. Your organization has been asked to invest in a continuing care retirement center. Your investment will be $600,000 per year for the next five years. After five years, cash flows will be $400,000 per year for the next 15 years. If your discount rate is 10%:

a) What is the present value of the investment?

600,000 * 5 = $3,000,000

b) What is the present value of the cash flows?

Discount Rate

10%

Cash Flows

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

400,000

NPV

$3,042,431.80

c) What is the profitability index?

$3,042,431.80 - $3,000,000 = $42,431.80