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healthcare finance > Finance Part 2 Test 1 > Flashcards

Finance Part 2 Test 1 Flashcards

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1
Q

Time Value Analysis

A

The use of time value of money techniques to value future cast flows, sometimes called discounted cash flow analysis

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2
Q

Time Line

A

A graphical representation of time and cash flows, may be an actual line or cells on a spreadsheet

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3
Q

Is an investment positive or negative on a number line?

A

Negative because you are losing the money

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4
Q

Why is sign convention important in Time Value Analysis?

A

essential to show whether it is an inflow or outflow of money, positive or negative, inflow = positive

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5
Q

Present Value

A

the beginning amount of an investment of a lump sum, an annuity, or a series of unequal cash flows

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6
Q

Compounding

A

The process of finding the future value of a lump sum, an annuity, or series of unequal cash flows

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7
Q

What is a lump sum?

A

type of compounding, there is a single starting point

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8
Q

What is compounding?

A

process of finding the future value

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9
Q

What is interest on interest?

A

compound interest, interest earned when interest payments are reinvested

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10
Q

How does the Future Value of a lump sum change as the time extended and interest rate increases?

A

Time extended leads to FV increase

Interest Rate Increases leads to FV increases

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11
Q

Discounting

A

the process of finding the PV of a lump sum, annuity, or a series of unequal cash flows

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12
Q

How is Discounting related to Compounding?

A

its the reverse of compounding

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13
Q

How does PV of a lump sum to be received in future change?

A

Time extended, longer the time, lower the PV

Interest Rate Increase, higher the rate, lower the PV

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14
Q

Opportunity Cost

A

cost associated with alternative uses the same funds

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15
Q

Example of Opportunity Cost

A

if money is used for one investment, it is no longer available for other uses

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16
Q

Why does an investment have an opportunity cost?

A

the money could be used for another investment or use applies to all investments no matter what

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17
Q

How are OC rates established?

A

the OC rate applied to an investment cash flow is the rate that could be earned on alternative investments of similar risk
the primary determinant is the riskiness of the cash flows being discounted

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18
Q

Does the OC rate depend on the source of the investment funds?

A

No, it depends only on the riskiness of cash flows and returns available on alt investments of similar risk

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19
Q

Future Value

A

later money on a time line

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20
Q

Interest Rate

A

“exchange rate” between earlier and later money

also called discount rate, cost of capital, OC of capital, and required return

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21
Q

FV formula

A

FV = PV (1+R)^T

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22
Q

Future Value Int Factor

A

(1+R)^T

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23
Q

PV Formula

A

PV = FV/(1+R)^T

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24
Q

Simple Interest Formula

A

Money Amount + (Number of Periods)(Money Amt)(Int Rate)

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25
Q

Examples of Financial Decisions that Typically involve uneven cash flows

A

the financial evaluation of a proposed outpatient clinic or MRI facility rarely involves constant cash flows

26
Q

How are PV of uneven cash flows found using a calculator?

A

Find the PV of each amt and then add them up

27
Q

How are PV of uneven cash flows found using excel?

A

=NPV (INT rate cell, Begin Amt:End Amt)

Amts go down, usually the first column

28
Q

What is meant by Net Present Value?

A

Function in excel, assumes that cash flows occur at the end of each period, calculated as of the beginning of the period of the first cash flow

29
Q

Annuity

A

includes the words “constant amt”
payments are the same in each period
a series of payments of a fixed amt for a specified number of equal periods

30
Q

What to use on excel to find NPER?

A

use it to solve for time

31
Q

What to use on excel to find RATE?

A

use it to solve for Interest rate

32
Q

What is the rule of 72?

A

(72)/(int rate) = years for money to double in value
(72)/(years) = interest rate required to double money in an account
simple and quick method for judging the effect of different interest rates on the growth of lump sum deposit

33
Q

Payment

A

PMT

in TVA, the dollar amt of an annuity cash flow

34
Q

Ordinary ( Regular ) Annuity

A

annuity with payments occurring at the end of each period

35
Q

Annuity Due

A

An annuity with payments occurring at the beginning of each period
Future Value of Annuity Due = FV of an ordinary annuity x (1 + Int Rate)

36
Q

Which type of annuity has a greater Future Value?

A

Annuity due because it is compounded for one additional unit

Greater by 1+Int

37
Q

Which annuity has a greater PV?

A

Annuity Due is larger than that of a similar regular annuity, payments are shifted left, discount for 1 less year

38
Q

Perpetuity

A

an annuity that lasts forever (has no maturity date)

39
Q

Perpetuity Formula

A

PV(Perpetuity) = Payment / Interest Rate

PMT/I

40
Q

What happens to the val of a perpetuity when int rate increases or decreases?

A

When the rate increases, value decreases

When the rate decreases, value increases

41
Q

Rate Formula

A

R = (FV/PV)^1/T - 1

42
Q

Time Formula

A

T = ln(FV/PV) / ln(1+r)

43
Q

How to determine the T value when their are multi cash flows when FV?

A

You take the total number of years minus what year the cash flow was made

44
Q

How to determine the T value when their are multi cash flows when PV?

A

The T amount is what year is was when the cash flow was made

45
Q

What is the FV function on excel?

A

FV(int rate, t value, , negative cash flow)

46
Q

How to decided whether or not you should make the investment?

A

If the FV of the investment is less than the PV or what you invest, then you should not

47
Q

Future Value in One Year

A

principal plus interest

find the interest by taking the rate and multiplying it by the investment amt

48
Q

PV on excel

A

when calculating the FV

should be negative

49
Q

FV on excel

A

When calculating the PV

should be negative

50
Q

Rate on excel

A

PV should be negative

FV should be positive

51
Q

NPER on excel

A

PV should be negative

FV should be positive

52
Q

Perpetuity Formula

A

PV = C/r

C is PMT on excel

53
Q

Annuity Formula PV

A

C((1-(1/((1+r)^t)))/r)

54
Q

Annuity Formula FV

A

C(((1+r)^t - 1 ) / r )

55
Q

PV on excel formula of an annuity

A

=PV(rate,years,payments)

56
Q

FV on excel formula of an annuity

A

=-FV(rate, nper, pmt)

make sure that it’s negative to make result positive

57
Q

PMT on excel

A

PMT(rate, nper, pv, fv)

if pmt is left negative, it shows that its a cash outflow

58
Q

NPER function on excel

A

NPER(rate, pmt, pv)

59
Q

Rate function on excel

A

RATE ( NPER, PMT, PV)

60
Q

Annuity due on excel

A

indicated by a 1 on type field

healthcare finance (7 decks)

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