Time Value Analysis And The Attractiveness Of Alternative Investments Finance Essay

Time Value Analysis And The Attractiveness Of substitute(a) Investments Finance EssayTime take to be abbreviationThe time economic value analysis can provide the healthc argon theatre director with the necessary information to make important decisions concerning financial st sendgies. The calculations of future change operates at particularized times are used to determine the attractiveness of alternative investments. The major limitation of the time value analysis is that a small exchange in cash fly the coop may resultant in a distorted assessment of a potential investment. Incremental cash flows should be estimated with great care to consider only those that could change if a confound or investment is accepted. The time value analysis of the Pensacola procedure bear ons go away explore the companys investment opportunities.The company has $50,000 in cash to invest in marketable securities. The option to invest in a bank credential of deposit (CD) that restoration hobby after 6 months to five years. The clear pastime would be reinvested at its maturity date. The future value of a nonpareil year CD that pays 10 share yearbook touch exit chalk up $55,000 at maturity (Table 1). The future value of a one year CD that pays 5 share or 15 percent will native $52,500 and 57,500 respectively. The other considerations are the banks procedure of combination the interest. The BankSouth offers a one year CD at 10 percent interest that is compound semi- one-yearly. This powerful yearly rate of 10.25 percent will yield a higher total of $55,125 that the yearly CD. The Bank of the States offers a 10 percentCertificate of Deposit (CD)$50,0000Investment10% yearbook touch on10%Semi-Annual Interest(10.25% effective)10%Daily Interest(10.52% effective)1-Year CD$55,000.00$55,125.00$55,257.795-Year CD$80,525.50$81,444.73$82,430.42Table 1 Certificate of Deposit Summary.CD that compounds daily. This results in a higher yield of $55,258 with an effectiv e annual rate of 10.52 percent. The BankSouth will likely offer a competitive rate on its semi-annual compounding CD of 10.3 percent to yield a total of $55,283. The effective annual rate becomes 10.57 percent. The Pensacola Surgery Centers can place $50,000 cash in a five year CD, and have the potential to significantly profit the earned interest. This will not allow other investments to utilize these cash in hand during this five year plosive speech sound. The five year CD with interest compounded annually yields $80,525. The semi-annual interest CD totals $81,144.73, and the daily interest CD yields $82.430.The operating theatre clinic has the financial goal of having $200,000 available for the purchase of a patient boot system in five years. If the clinic invested a lump sum in a one year CD with 10 percent annual interest, it would need to deposit $124,184.26 today. Another choice would require the deposit of $100,000 in a five year CD with an annual 15 percent interest to result in the necessary $200,000 in coin.The Pensacola Surgery Center may consider the option of an ordinary rente to build the funds necessary for the computer application. The ability to make yearly allowances to the account or else than an initial lump sum will decrease the amount of cash flow deterred from other investment opportunities. If five annual payments of $32,000 are salaried at the end of each year, the present value result is $121,305 with an annual opportunity cost of 10 percent. The increase to $138,543 will result if the interest is compounded semi-annually. The future value of the annuity that pays 10 percent interest annually is $195,363, and rock-bottom to $176,820 if compounded semi-annually. The annual interest necessary to conglomerate the necessary $200,000, by making the $32,000 yearly payments, is 11 percent. Alternatively, the annual payment of $32,759.50 with 10 percent interest is needed to reach the $200,000 in funds. If the payments are change d to $16,000 every half dozen months, starting six months from today, the future value would total $254,999 with 10 percent annual interest (Table 2). The future value of the payments with 10 percent interest compounded semi-annually yields $201,246. The $16,000 semi-annual payment schedule will forgather the necessary funds for the capital expenditure.Annuities$16,000Semi-AnnualPaymentsFuture Value10 % Annual InterestFuture Value10% Semi-Annual InterestOrdinary annuity$254,998.79$201,246.28Annuity Due$280,498.67$211,308.59Table 2 Future Value of Annuities Summary.The annuity due suit is when the payments are made at the beginning of the period. This type of annuity will result in the maturity one period past the final payment. The present value of the same five annual $32,000 payments will yield $133,436 with an opportunity cost of 10 percent annually. The exercise of a 10 percent semi-annual interest rate will result in $145,470. The future value of the annuity if 10 percent a nnual interest is paid yields $214,899, and with 10 percent semi-annually the result is decreased to $185,661. The annual interest rate of 8 percent is needed to accumulate the call for $200,000 funds with the yearly $32,000 payments. The reduced yearly payment of $29,781 is needed for an annuity with a 10 percent annual rate. The change of the payments to $16,000 every six months results in $280,499 in an annuity that compounds at 10 percent annually. This is decreased to $211,309 if the 10 percent interest is semi-annual. The annuity due with semi-annual payments results in a greater accumulation of funds necessary for the computer billing upgrade.The Pensacola Surgery Centers would like to lease out extra space at one location for the term of five years. This venture will cost an estimated $40,000 in initial renovations. The net present value (NPV) of the estimated lease cash flow totals $58,618 (Table 3). The future value of the five year lease cash flow is expected to total $7 6,223 when invested at 10 percent annually. The present value of this total yields only $47,329 (difference of $11,289) when compared to the NPV calculated initially. The inconsistency of the time value analysis is due to the incremental changes that may become magnified with end results. The manager must use reasonable judgment when interpreting these calculated results. fire of YearNet Cash melt1$12,0002$14,0003$ 2,0004$16,0005$20,000Table 3 Estimated Lease Cash FlowThe further analysis of the lease will determine the dollar call back on the investment and include the cost of the renovations. The return on investment (ROI) of the lease cash flow and the renovations total $39,390. The percentage rate of return utilizes the internal rate of return (IRR) calculation. The expected rate of return is 16 percent which exceeds the 10 percent opportunity cost by 6 percent. The ROI calculations support the clinics financial investment in the lease agreement.The contingency fancy if the c linic is unable to accumulate the $200,000 necessary for the computer improvements will require them to draw the funds. The loan will require yearly payments of $63,094.16 for four years at 10 percent interest (Table 4). The total interest plus headland paid at the end of the loan is $252,376.64. The business will be able to deduct the yearly interest payments on their income taxes for a total of $52,376.64.$200,000 loanwordYearPaymentInterestRepayment of Principle1$ 63,094.16$20,000.00$ 43,094.162$ 63,094.16$15,690.58$ 47,403.583$ 63,094.16$10,950.23$ 52,143.934$ 63,094.16$ 5,735.83$ 57,358.33Total$252,376.64$52,376.64$200,000.00Table 4 Loan Amortization ScheduleThe utilization of time value analysis back up in the financial decision making processes of the businesss investment management. The calculations attempt to portray the opportunity cost of these potential investments. The discount rate used to head the analysis should reflect the risk associated with the investment an d the risk of the organization. Good decisions are based on the understanding of the businesss financial strategies, and the appropriateness of the analysis to these objectives. The nominate completion review of investment decisions should be conduct to assess the processes and results.