Investment Payback Calculation

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Submit written responses to these questions.

  1. What is the difference between simple interest and compound interest?
  2. What is the future value of $10,000 with an interest rate of 16 percent and one annual period of compounding? With an annual interest rate of 16 percent and two semiannual periods of compounding? With an annual interest rate of 16 percent and four quarterly periods of compounding?
  3. What is the relationship between the present value factor and future value factor?
  4. Compare the results of the present value of a $6,000 ordinary annuity at 10 percent interest for 10 years with the present value of a $6,000 annuity due at 10 percent interest for 11 years. Explain the difference.
  5. If a nurse deposits $1,000 today in a bank account and the interests is compounded annually at 12 percent, what will be the value of this investment:
    • Five years from now?
    • Ten years from now?
    • Fifteen years from now?
    • Twenty years from now?
  6. Comment of the following statement. “When a not-for-profit facility receives a contribution from a member of the community, the cost of capital is inconsequential when deciding how to use this contribution, because it is, in effect, free money.”
  7. What are the primary drawbacks of the payback method as a capital budgeting technique?
  8. Explain why pro forma income statements adjust for depreciation expense when developing projected cash flows for a project.
  9. Will a decision that is based upon NPV ever change if it were based upon IRR instead? Why or why not?

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