Why is time value analysis important to healthcare financial management?
Investopedia Video: Time Value Of Money Explained
In this video, since the trade off is $1 million today, or $1million in one year, regardless of the interest rate used, one would always be better off taking the money today. A more realistic choice, taken from the Powerball website is, Do you take the prize of $216 million spread out over 30 years in equal installments, or do you take $124.8 million today?
If we use a 4% rate, the value of the 30 payments is $129.5 million, so compared to the one-time payment of$124.8 million, we should take the 30 payments. If we use a 5% rate to discount the cash flows, the value of the 30 payments is $116.2 million, so we should take the one time payment. (We will learn how to calculate things like this over the next weeks!)
In textbook examples, the rate is given, but in real life, how do we determine what rate to use?
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