Panhandle Surgery Center case study Time Value Analysis Immediately after assuming his new position, Gary has to face several decisions. First the company currently has $100,000 in its cash account but the target cash balance is only $50,000. Thus Gary wants to temporary invest the excess $50,000 in marketable securities which typically consist of low risk sort term securities such as Treasury bills or money market mutual funds. One alternative that Gary is consideration is to invest the fifty thousand in a Bank certificate of deposit (CD). CDs are generally available in maturities from six months to ten years, and interest can be handled in one or two ways: the investor can receive periodic interest payment or the interest can automatically be reinvested in CD. In the latter case the buyer receives no interest during the life of the CD but receives the accumulated interest plus principal amount are maturity. Because the goal of this investment is to accumulate funds future use, as opposed to generate current income, all interest earned on CD would be reinvested. Second, the company recently bought a new hardware/software system to handle its patients billings. However, it is obvious even now that the current system will have to be replaced with an even more sophisticated system about five years. After making some inquiries to potential vendors, Gary estimated the future cost of the new system to be $200,000. To ensure that the funds are available to make this purchase, Gary is planning either to deposit a lump sum today in an interest bearing account or to make annual payment into the same account. Third, Panhandle surgery center has some extra space at one of its locations that it might lease out for five years. The initial renovation cost, which includes new flooring and lighting as well as new outside entrance, is estimated to be $40,000. Because of some unusual terms in the proposed lease contract, and also because of a promise to add more computer ports in three years, the net cash inflows expected from the lease follow this uneven pattern: End of year Net Cash flow 1 $12,000 2 14,000 3 2,000 4 16,000 5 20,000 The decision that Gary faces all involves time valued analysis. As a check on your skills, see if you can answer the following question. a) Assume that it is five years later and the company was unable to accumulate the $200,000 needed to make the software purchase. Instead, it is force to borrow the $200,000. The loan calls for repayment in equal installments over a four-year period, with the first payment due at the end of one year. Assuming that the company can borrow the funds at 10% rate, what amount of interest and principal will be repaid at the end of each year of the loan?