Question

Health Care Finance: Basic Tools For Nonfinancial Managers, Fifth Edition Judith J. Baker, R.W. Baker, and Neil R. Dworkin Assignment Exercise 13-1 Assignment Exercise 13-1 Assignment Exercise 13-1: Unadjusted Rate of Return Metropolis Health Systems' Laboratory Director expects to purchase a new piece of equipment. The assumptions for the transaction are as follows: • Average annual net income = $70,000 • Original investment amount = $410,000 • Unrecovered asset cost at the end of useful life (salvage value) = $41,000 Required 1. Compute the unadjusted rate of return using the original investment amount. 2. Compute the unadjusted rate of return using the average investment method. Example 13B: Finding the Future Value (with a Compound Interest Table) Betty Dylan is Director of Nurses at Metropolis Health System. Her oldest son will be entering college in five years. Today Betty is trying to figure what his college fund will amount to in five more years. (Hint: Compound interest means interest is not only earned on the principal, but also is earned on the previous interest earnings that have been left in the account. Interest is thus compounded.) The college fund savings account presently has a balance of $9,000 and any interest earned over the next five years will be left in the account. Betty assumes the annual interest rate will be 6%. How much money will be in the account at the end of five more years? Solution to Example Step 1. Refer to the Compound Interest Table appearing in Appendix 13-B at the back of this chapter. Reading across, or horizontally, find the 6% column. Reading down, or vertically, find Year 5. Trace across the Year 5 line item to the 6% column. The factor is 1.338. Step 2. Multiply the current savings account balance of $9,000 times the factor of 1.338 to find the future value of $12,042. In five years at compound interest of 6%, the college fund will have a balance of $12,042.

Answer 1

Answer:

Rate of Return using the original investment amount

= Annual net income generated / original investment value

= $70,000 / $410,000

= $70,000 / $410,000

= 17.07%

Average value of investment =

= (Initial investment + salvage value) / 2

= ($410,000 + $41,000) / 2

= ($410,000 + $41,000) / 2

= $451,000 / 2

= $451,000 / 2

= $225,500

The average accounting rate of return =

= Annual net income generated / average value of investment

=$70,000 / $225,500

= 31.04%