Healthcare Finance II Exam 1

Present Value Definition

Earlier money on a timeline

Future Value

Later money on a timeline

Interest Rate

“exchange rate” between earlier between and later money

Examples of Interest Rate

• Discount rate

• Cost of capital

• Opportunity cost of capital

• Required return

Future Value Formula

PV (1 + r)^t

r =

period interest rate, expressed as a decimal

t =

number of periods

Present Value Formula

(FV)(1/(1+r)^t

What does it mean when we talk about “discounting?”

Finding the present value for some future amount

What does it mean when we talk about the “value” of something?

The present value unless indicated otherwise

Simple Interest

money or interest earned on initial investment

Compound Interest

money or interest earned on initial investment and interest earned

“Interest on Interest”

First City Bank pays 4.4 percent simple interest on its savings account balances, whereas Second City Bank pays 8.6 percent interest compounded annually.

If you made a $756 deposit in each bank, how much more would the Second City Bank account be worth than the First City Bank account at the end of 2 years?

$69

First City Bank pays 1.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.2 percent interest compounded annually.

If you made a $929 deposit in each bank, how much more would the Second City Bank account be worth than the First City Bank account at the end of 4 years?

$242

Solve for Future Value

PV	$28,225
Years	15
Interest Rate	0.136

$191,121

Solve for Present Value

Future Value	466,321
Years	2
Interest Rate	10.3%

$383,296