Future value is used to determine the value of dollar payments in the future, whereas present value indicates the current value of future dollars. Either simple interest, where interest is only calculated on the principal, or compound interest, where the interest is calculated on the principal and the interest, can be used to determine the future value of money. The compound interest method produces a larger sum of money in the future and is the standard method used.

Part 1

Pasadena Healthcare has borrowed $1,000,000 on a five-year, annual payment term load at a 15 percent rate. The first payment is due one year from now. Construct the amortization schedule for this loan.

Part 2

Find the following values assuming a regular, or ordinary, annuity:

• 2.1. The percent value of $400 per year for ten years at 10%
• 2.2. The future value of $400 per year for ten years at 10%
• 2.3. The present value of $200 per year for five years at 5%
• 2.4. The future value of $200 per year for five years at 5%
• 2.5. Repeat problems 2.1. through 2.4, but assume the annuities are annuities due.

Part 3

Discuss why the concept of time value of money is important to long-term project decisions. Can you give examples from your own experience?