Imagine you are the chief financial officer (CFO) of a hospital, and you must decide on whether your hospital will outright purchase a new MRI machine or lease it over the next 5 years.
Watch “Time Value of Money (TVM).” https://multimedia.phoenix.edu/video/?v=792145136
TRANSCRIPT
time value and money at a personal level. I know that you make decisions daily as to paying your bills whether you should use cash or credit card and so on.
The work life you find situations where time value and money also relatable Let me Give an example. You don’t want your employees to be clocking in five minutes too early or five minutes too late because usually in my case in our organization, we use Kronos as an example to track that payroll on time keeping. So what happened is that every five minutes indicates 0.25 hours of overtime. So over a period of time it adds up tremendously. So one more time value money.
Now, let me start by illustrating the following. What would you rather have a hundred dollars right now? or a hundred dollars after one year where the answer of course should be a hundred dollars now.
Why? You see because there’s a Time Value to the money.
Because you can do more with a $100 now rather than waiting a year from now because you could invest they wanted the dollars a hundred dollars earning 10% per year.
Or in other words 110 dollars after one year having $110 at 10% per year is the same as having a hundred dollars today.
You see future money has more risk and you may never get it for multiple reasons such as inflation.
Which will decrease the value of any future earnings.
The application of Time Value and money sometimes it’s abbreviated as TVM is in healthcare Finance is extremely relevant and important and as a manager or administrative of your health care facility, you will find as very useful because he will help you in making key decisions.
What kind of decisions you may ask? Well should I buy or should I at least the equipment that I need from a department? Which project should I go with? Building an outpatient pharmacy in the hospital or building a freestanding ER outside the hospital to feed more patient bogging to my facility.
There are many tools using time value money to calculate the different types of problems that you will face.
The first one that comes to my mind here is present value.
It’s pretty straightforward present value is an amount of money. Today is worth more than the same amount of money in the future as Illustrated with the example earlier.
Future value is the value of a current asset at a future point in time based on a certain assume rate of growth.
The third component here that we’re discussing is net present value.
That is a difference between the present value of all the cash influence.
Against all the cash outflows over a period of time.
Another concept you need to bear in mind is the internal rate of return.
This is a discount rate in other words the interest rate.
That makes the net present value of all the cash flows positive and negatives in other words the influence of the affluence equal to zero.
For any specific project or investment? So what are some of the application of Time Value money? Well, it will help you to make better decisions to select the best financial option.
Time value of money in other words equalizes the options based on the timing because it is an absolute dollar amount spanning different time periods. Not necessarily to be value equally.
Healthcare organizations oftentimes look at the value of the money in order to compare projects with different cash flows.
In my experience as a healthcare administrator, I can tell you that learning about time value money will give you the tools to make sound financial decisions which are needed use in time value of money. Furthermore will help you to make the right financial decision with that why range of options? Moreover it will guide you in the right direction by using quantitative methodology and not just qualitative opinions in order to avoid wasting resources of people inventory and equipment.
This is all for now.
After watching the video, respond to the following prompts:
What are the advantages and disadvantages of buying or leasing the new MRI machine?
Why do you think it is important for health care managers to make proper investment decisions? Share an example to support your answer.
