Application 3: Calculations: Monetary Value Calculations

When planning for a capital expenditure or considering a long-term investment, there are a number of methods by which a health care organization can predictively calculate the value of money as part of the financial decision-making process.

To prepare for the Calculations, review the sections of Chapter 6 ("The Time Value of Money") from your Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook that explain how to use an Excel spreadsheet to calculate monetary values. (The pertinent section of Chapter 6 to review for each type of Calculation is identified in the below list of Calculations, under the respective listing for that particular Calculation.) Then, read through the financial scenarios provided below, which contain the information that you will use to populate and perform the Calculations.

To complete the Calculations, use the Financial Formula functions in Microsoft Excel to perform five monetary value Calculations, which you will complete using information from the provided financial scenarios. Submit your completed Calculations in an Excel spreadsheet with five tabsone tab for each of the following monetary value Calculations and with that particular tab reflecting only the result of that particular Calculation:

Calculation 1The future value of a single monetary amount invested today (i.e., what a lump-sum amount invested today will be worth at a given time in the future using the compound interest method)

Scenario

An uninsured patient who underwent emergency surgery at Memorial Hospital owes $10,000 for the services that he received. Because he will be unable to work during his recovery, the patient has requested that the hospital not pursue collecting the $10,000 for a period of 1 year, after which time he will pay the hospital in full in a single lump sum. Memorial Hospital has a strong cash position and, given the patient's medical and financial situation, it would prefer to avoid putting his account into collections. As such, the hospital is actively considering the patient's request. In order to determine what amount the patient would need to pay in 1 year's time so that the hospital would not be losing any money on the delayed payment, Memorial Hospital's billing unit has calculated the future value of the $10,000 that the patient owes. Their calculation is based on an interest rate of 6%, which reflects an average of the current rates on the market that the hospital could expect to earn were it to have the $10,000 available to invest today, rather than having to wait for the patient to make the payment in 1 year's time. What did the hospital's billing unit determine the future value of the $10,000 owed would be?

Note: For detailed information on how to perform this type of Calculation, review the section "Using a Spreadsheet to Calculate Future Value" and Exhibit 6-5 "Using Excel to Calculate the Future Value for a Single Payment" on page 266 of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

Calculation 2The present value of a single monetary amount to be received in the future (i.e., the value today of a lump-sum payment to be received in the future, taking into account the cost of capital)

Scenario

After some additional discussions with the Memorial Hospital billing unit, the uninsured patient in the Scenario for Calculation 1who underwent emergency surgery at the hospital, who owes $10,000 for the services that he received, and who requested that the hospital not pursue collecting the $10,000 for 1 yearhas proposed that, at the end of the 1-year time period, he pay the hospital a lump sum of $10,700. In order to determine whether or not it would be financially advisable for it to accept the patient's proposal, Memorial Hospital's billing unit has calculated the present value of the $10,700 lump sum that the patient has offered to pay the hospital in 1 year's time. As in Scenario 1, their calculation is based on an interest rate of 6%, which reflects an average of the current rates on the market. What did the hospital's billing unit determine the present value of the future payment of $10,700 to be?

Note: For detailed information on how to perform this type of Calculation, review the section "Using a Spreadsheet to Calculate Present Value" and Exhibit 6-8 "Using Excel to Calculate the Present Value for a Single Payment" on page 269 of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

Calculation 3The future value of an ordinary annuity payment (I.e., what an equal series of payments will be worth at some future date using compound interest)

Scenario The family of a former patient has decided to make a series of annual donations to Memorial Hospital for a period of 5 years, giving the hospital a single payment of $20,000 at the end of each year to be used for a planned expansion of the hospital's Cancer Center. In order to determine the future value of this ongoing donation and to plan financially for its use in the expansion effort, the hospital is projecting that the series of donations will earn an average annual interest rate over the 5-year period of 8%. In light of this, what would the future value of the total donation to Memorial Hospital be at the end of the 5 years?

Note: For detailed information on how to perform this type of Calculation, review the section "Using a Spreadsheet to Calculate the Future Value of an Ordinary Annuity" and Exhibit 6-10 "Using Excel to Calculate the Future Value for an Ordinary Annuity Payment" on pages 271 and 272, respectively, of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

Calculation 4The present value of an ordinary annuity payment (i.e., what a series of equal payments in the future is worth today, taking into account the time value of money)

Scenario

Based on the Scenario for Calculation 3, Memorial Hospital also wishes to determine the present value of the 5-year series of end-of-year $20,000 donations that it will be receiving annually from the family of a former patient for the planned expansion of its Cancer Center. Still assuming that the donations will earn an average interest rate over the 5-year period of 8%, what would the present value of the total donation to Memorial Hospital be?

Note: For detailed information on how to perform this type of Calculation, review the section "Using a Spreadsheet to Calculate the Present Value of an Ordinary Annuity" and Exhibit 6-12 "Using Excel to Calculate the Present Value for an Ordinary Annuity Payment" on page 274 of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

Calculation 5The interest rate of a loan with fixed loan payments (i.e., a loan for which the payments will be equal over the life/length of the loan)

Scenario

To purchase a new piece of diagnostic imaging equipment for use in its expanded Cancer Center, Memorial Hospital is considering taking out a $100,000 loan that would require the organization to make an annual payment to the lender at the end of each year for a period of 6 years. If the amount of the annual payment that the hospital would be making at the end of each year is $21,000, what would the interest rate be for Memorial Hospital's loan to finance the new equipment?

Note: For detailed information on how to perform this type of Calculation, review the section "How to Solve for the Interest Rate of a Loan with Fixed Loan Payments" and Exhibit 6-16 "Using the Excel Rate Function to Compute a Loan Rate" on pages 280 and 281, respectively, of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

Save your Calculations as a ".xls" file.

Readings for application 3

Course Text: Zelman, W. N., McCue, M. J., & Glick, N. D., Thomas, M. S. (2014). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (4th ed.). San Francisco, CA: Jossey-Bass.

Chapter 6, "The Time Value of Money"

This chapter explains why the dollar today is worth more than a dollar in the future. It also explains how to calculate common monetary values.

Appendix B, "Future and Present Value Tables" This reading selection features pre-calculated tables that can be used to determine present and future dollar values.

Course Text:Beyond Return on Investment: Expanding the Value of Healthcare Information Technology

o Chapter 1, "Introduction: Setting the Stage for Value Realization"

This chapter reflects on the term value as it relates to health information technology and evaluates the impact of clinical systems on health care. It also discusses how the determination of return on investment and the analysis of value are becoming increasingly sophisticated within the health care industry.

o Chapter 2, "Healthcare Information Technology as a Strategic Asset: A Framework for Value Management" This chapter introduces a value management framework for health information technology business and technical leaders, offering a different way to think about value within an organization and identifying the leadership style that is required to be successful in this new approach.

Course Text: Wager, K. A., Lee, F. W., & Glaser, J. P. (2009). Health care information systems: A practical approach for health care management(2nd ed.). San Francisco, CA: Jossey-Bass.

Chapter 15, "Assessing and Achieving Value in Health Care Information Systems" (Note: This chapter was included a Learning Resource in HINF 6130. You are revisiting it in HINF 6235 as a theoretical foundation for key financial and organizational concepts related to health information technology that will be explored in Weeks 5 through 7 of the course.) This chapter explores both the tangible and the intangible value of an information technology system and the steps that may be taken to help improve this value realization. It also discusses using the project proposal to help determine information technology value.

Websites

MeasuringWorth.com http://www.measuringworth.com/index.php This site makes available to the public historical data on important economic aggregates, with an emphasis on the calculation of relative worth over time. Review the following elements of the site:

The essay "Explaining the Measures of Worth" (which can be accessed from the site's menu via the listing for Essays in Measures of Worth)

The page featuring "Seven Ways to Compute the Relative Value of a U.S. Dollar Amount1774 to Present" (which can be accessed from the site's menu via the listing for The Calculators)

The page featuring "Purchasing Power of Money in the United States from 1774 to 2000" (which can be accessed from the site's menu via the listing for The Calculators)

The page featuring "How Much Would Your U.S. Savings Have Grown?" (which can be accessed from the site's menu via the listing for The Calculators)