The safest way to double your money is to fold it over once and put it in your pocket.

Frank McKinney (Kin) Hubbard

Business finance looks at how dentists use money in dental practice to gain or improve profitability. Dentists use money to purchase equipment and materials, hire staff members, and pay the costs of the business. Applying finance principles properly maximizes the profit from the practice.

TIME VALUE OF MONEY

A basic premise of finance is that money has a timeassociated value and time has a money‐associated value. A dollar in the future will be worth less than a dollar received today, just as paying a dollar in the future is less costly than paying a dollar today. There is a psychological reason for this, given that most people prefer the certainty of having a dollar now to the uncertainty of having a dollar in the future. That future dollar will be worth less because of the likelihood of inflation eating away at its buying power. In addition, a dollar invested wisely will bring a positive return, increasing the value of that present dollar in the future. Time value of money calculations let someone evaluate how much less that future dollar is worth so they can make informed financial decisions. This is done by bringing cash flows to a present value for comparison. The higher the assumed interest rate, the more important these calculations become.

These calculations all depend on the idea of compounding. This is the financial process in which someone earns interest on the principal amount, and then they earn interest on the interest and the principal. That person thus earns interest on an increasing amount over time. The total amount compounds as the interest portion becomes larger and larger.

For example, someone feels they need $3 million (in today’s money) to retire comfortably in 30 years. If 3% annual inflation is assumed, how much will they need to save each year to meet the goal? Or say someone agrees to buy a dental practice for $350 000 after a five‐year associateship. How much is that in today’s money? The answers to these questions have an obvious, important financial impact.

These numbers can easily be calculated with a financial calculator (e.g. HP 12‐C), a spreadsheet with financial functions (Excel), or the tables included in this chapter. Although these tables do not give the precise results that a banker may have available, they are more than adequate for planning purposes. Throughout the chapter, several common examples of using these important techniques are given.

FUTURE VALUE OF A PRESENT AMOUNT

The future value of a present amount is the future amount of an initial deposit when compounded for a given number of periods at a given rate. This calculation is important when planning future expenditures or savings. To compute this amount, the first three of the four values are needed:

PV	Present value, the amount in today’s dollars
i	Interest rate, the compounding rate for each period
n	Number of periods, number of compounding periods
FV	Future value, the amount in future dollars

Using Table 16.1, find the future value factor (FVF) for the given i and n. Multiply the PV by the FVF to figure out the FV:

	2%	3%	4%	5%	6%	7%	8%	9%	10%	12%	15%	20%
1	1.0200	1.0300	1.0400	1.0500	1.0600	1.0700	1.0800	1.0900	1.1000	1.1200	1.1500	1.2000
2	1.0404	1.0609	1.0816	1.1025	1.1236	1.1449	1.1664	1.1881	1.2100	1.2544	1.3225	1.4400
3	1.0612	1.0927	1.1249	1.1576	1.1910	1.2250	1.2597	1.2950	1.3310	1.4049	1.5209	1.7280
4	1.0824	1.1255	1.1699	1.2155	1.2625	1.3108	1.3605	1.4116	1.4641	1.5735	1.7490	2.0736
5	1.1041	1.1593	1.2167	1.2763	1.3382	1.4026	1.4693	1.5386	1.6105	1.7623	2.0114	2.4883
6	1.1262	1.1941	1.2653	1.3401	1.4185	1.5007	1.5869	1.6771	1.7716	1.9738	2.3131	2.9860
7	1.1487	1.2299	1.3159	1.4071	1.5036	1.6058	1.7138	1.8280	1.9487	2.2107	2.6600	3.5832
8	1.1717	1.2668	1.3686	1.4775	1.5938	1.7182	1.8509	1.9926	2.1436	2.4760	3.0590	4.2998
9	1.1951	1.3048	1.4233	1.5513	1.6895	1.8385	1.9990	2.1719	2.3579	2.7731	3.5179	5.1598
10	1.2190	1.3439	1.4802	1.6289	1.7908	1.9672	2.1589	2.3674	2.5937	3.1058	4.0456	6.1917
15	1.3459	1.5580	1.8009	2.0789	2.3966	2.7590	3.1722	3.6425	4.1772	5.4736	8.1371	15.4070
20	1.4859	1.8061	2.1911	2.6533	3.2071	3.8697	4.6610	5.6044	6.7275	9.6463	16.3665	38.3376
25	1.6406	2.0938	2.6658	3.3864	4.2919	5.4274	6.8485	8.6231	10.8347	17.0001	32.9190	95.3962
30	1.8114	2.4273	3.2434	4.3219	5.7435	7.6123	10.0627	13.2677	17.4494	29.9599	66.2118	237.3763

Box 16.1 presents several example problems (#1, 2, and 3) for this calculation and their solutions.

PRESENT VALUE OF A FUTURE DOLLAR

The present value of a future amount is how much must be deposited today to have a given amount in the future when compounded for a given number of periods at a given rate. This calculation is not used as much as the other calculations, but it is still important when planning future expenditures. To compute this amount, the first three of the four values are needed:

FV	Future value, the amount in future dollars
i	Interest rate, the compounding rate for each period
n	Number of periods, number of compounding periods
PV	Present value, the amount in today’s dollars

Using Table 16.2, find the present value factor for the given interest and number of periods. Multiply the FV by the PVF to figure out the PV:

Box 16.2 presents an example problem using this calculation.

ANNUITIES

An annuity is a series of regular, periodic payments. When someone buys a car and sets up a loan, the repayment is an annuity. If a savings plan is established in which a certain amount is set aside each month, an annuity has been established. Because an annuity compounds (i.e. earns interest on the interest earned), a table is needed to determine how much the annuity earns or costs. Two annuity tables will be used. One (Table 16.3) determines how much a regular savings plan will be worth in the future. The other (Table 16.4) determines how much the payment on a loan will be.

Determining Payments

When someone repays loans as an annuity, the loans are usually compounded monthly. Table 16.3 determines a monthly payment based on compounding the interest monthly. If the interest is 12% per year compounded monthly, the actual interest rate is 12.68% (1% compounded monthly). This amount will be more than an annual compounding amount, but it is more accurate. (Tables 16.3 and 16.4 have this conversion built into them.)

To compute the payment amount, the first three of the four values are needed:

PV	Present value, the amount of the loan principal
i	Interest rate, the annual interest rate charged on the loan
n	Number of years, number of years you will pay on the loan
PMT	Payment, amount of the periodic payment

	2%	3%	4%	5%	6%	7%	8%	9%	10%	12%	15%	20%
1	0.9804	0.9709	0.9615	0.9524	0.9434	0.9346	0.9259	0.9174	0.9091	0.8929	0.8696	0.8333
2	0.9612	0.9426	0.9246	0.9070	0.8900	0.8734	0.8573	0.8417	0.8264	0.7972	0.7561	0.6944
3	0.9423	0.9151	0.8890	0.8638	0.8396	0.8163	0.7938	0.7722	0.7513	0.7118	0.6575	0.5787
4	0.9238	0.8885	0.8548	0.8227	0.7921	0.7629	0.7350	0.7084	0.6830	0.6355	0.5718	0.4823
5	0.9057	0.8626	0.8219	0.7835	0.7473	0.7130	0.6806	0.6499	0.6209	0.5674	0.4972	0.4019
6	0.8880	0.8375	0.7903	0.7462	0.7050	0.6663	0.6302	0.5963	0.5645	0.5066	0.4323	0.3349
7	0.8706	0.8131	0.7599	0.7107	0.6651	0.6227	0.5835	0.5470	0.5132	0.4523	0.3759	0.2791
8	0.8535	0.7894	0.7307	0.6768	0.6274	0.5820	0.5403	0.5019	0.4665	0.4039	0.3269	0.2326
9	0.8368	0.7664	0.7026	0.6446	0.5919	0.5439	0.5002	0.4604	0.4241	0.3606	0.2843	0.1938
10	0.8203	0.7441	0.6756	0.6139	0.5584	0.5083	0.4632	0.4224	0.3855	0.3220	0.2472	0.1615
15	0.7430	0.6419	0.5553	0.4810	0.4173	0.3624	0.3152	0.2745	0.2394	0.1827	0.1229	0.0649
20	0.6730	0.5537	0.4564	0.3769	0.3118	0.2584	0.2145	0.1784	0.1486	0.1037	0.0611	0.0261
25	0.6095	0.4776	0.3751	0.2953	0.2330	0.1842	0.1460	0.1160	0.0923	0.0588	0.0304	0.0105
30	0.5521	0.4120	0.3083	0.2314	0.1741	0.1314	0.0994	0.0754	0.0573	0.0334	0.0151	0.0042

Use Table 16.3 to determine the annuity monthly payment (AMP) factor for the loan’s annual interest rate and term (number of years). Multiply the resulting AMP by the number of thousands of dollars of loan principal. Remember, this is a monthly payment per $1000 borrowed. Be sure to multiply by 12 for an annual amount.

Box 16.3 presents two problems (#5 and 6) that ask how to determine the amount of a payment for a loan.

Determining Savings

When a regular savings plan is established, an annuity is essentially being set up. A series of regular payments are made into an account. That account earns interest on the money deposited each period and earns interest on interest earned in the account.

To compute the payment amount, the first three of the four values is needed:

i	Interest rate, the annual interest rate earned on the annuity
n	Number of years, number of years you will pay into the annuity
PMT	Payment, amount of the annual payment into the annuity
FV	Future value, the future amount the annuity will be worth

Use Table 16.4 to determine the future value annuity (FVA) factor for the annuity’s annual interest rate and term (number of years). Multiply the resulting FVA by the amount of the regular annual payment (in dollars).

Box 16.4 presents three problems (#7, 8, and 9) that use this calculation.

	2%	3%	4%	5%	6%	7%	8%	9%	10%	12%	15%	20%
1	84.24	84.69	85.15	85.61	86.07	86.53	86.99	87.45	87.92	88.85	90.26	92.63
2	42.54	42.98	43.42	43.87	44.32	44.77	45.23	45.68	46.14	47.07	48.49	50.90
3	28.64	29.08	29.52	29.97	30.42	30.88	31.34	31.80	32.27	33.21	34.67	37.16
4	21.70	22.13	22.58	23.03	23.49	23.95	24.41	24.89	25.36	26.33	27.83	30.43
5	17.53	17.97	18.42	18.87	19.33	19.80	20.28	20.76	21.25	22.24	23.79	26.49
6	14.75	15.19	15.65	16.10	16.57	17.05	17.53	18.03	18.53	19.55	21.15	23.95
7	12.77	13.21	13.67	14.13	14.61	15.09	15.59	16.09	16.60	17.65	19.30	22.21
8	11.28	11.73	12.19	12.66	13.14	13.63	14.14	14.65	15.17	16.25	17.95	20.95
9	10.13	10.58	11.04	11.52	12.01	12.51	13.02	13.54	14.08	15.18	16.92	20.03
10	9.20	9.66	10.12	10.61	11.10	11.61	12.13	12.67	13.22	14.35	16.13	19.33
15	6.44	6.91	7.40	7.91	8.44	8.99	9.56	10.14	10.75	12.00	14.00	17.56
20	5.06	5.55	6.06	6.60	7.16	7.75	8.36	9.00	9.65	11.01	13.17	16.99
25	4.24	4.74	5.28	5.85	6.44	7.07	7.72	8.39	9.09	10.53	12.81	16.78
30	3.70	4.22	4.77	5.37	6.00	6.65	7.34	8.05	8.78	10.29	12.64	16.71

	2%	3%	4%	5%	6%	7%	8%	9%	10%	12%	15%	20%
1	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000
2	2.020	2.030	2.040	2.050	2.060	2.070	2.080	2.090	2.100	2.120	2.150	2.200
3	3.060	3.091	3.122	3.153	3.184	3.215	3.246	3.278	3.310	3.374	3.473	3.640
4	4.122	4.184	4.246	4.310	4.375	4.440	4.506	4.573	4.641	4.779	4.993	5.368
5	5.204	5.309	5.416	5.526	5.637	5.751	5.867	5.985	6.105	6.353	6.742	7.442
6	6.308	6.468	6.633	6.802	6.975	7.153	7.336	7.523	7.716	8.115	8.754	9.930
7	7.434	7.662	7.898	8.142	8.394	8.654	8.923	9.200	9.487	10.089	11.067	12.916
8	8.583	8.892	9.214	9.549	9.897	10.260	10.637	11.028	11.436	12.300	13.727	16.499
9	9.755	10.159	10.583	11.027	11.491	11.978	12.488	13.021	13.579	14.776	16.786	20.799
10	10.950	11.464	12.006	12.578	13.181	13.816	14.487	15.193	15.937	17.549	20.304	25.959
15	17.293	18.599	20.024	21.579	23.276	25.129	27.152	29.361	31.772	37.280	47.580	72.035
20	24.297	26.870	29.778	33.066	36.786	40.995	45.762	51.160	57.275	72.052	102.444	186.688
25	32.030	36.459	41.646	47.727	54.865	63.249	73.106	84.701	98.347	133.334	212.793	471.981
30	40.568	47.575	56.085	66.439	79.058	94.461	113.283	136.308	164.494	241.333	434.745	1181.882

CAPITAL BUDGETING

Capital assets are things that the practice owns that last for several to many years. Examples include dental chairs, computers, curing lights, and furniture. These long‐term assets are usually purchased with a loan that also lasts for a long time. In fact, most corporate finance officers try to match the term of the loan with the approximate expected lifetime of the asset. They do not want to extend the term of the loan for a longer period than the useful lifetime. (No one wants to be still paying for a piece of equipment after it has been disposed of.) Capital assets are usually large, expensive pieces of equipment. The decisions about financing these assets carry a large price tag. So, planning for the purchase of these assets becomes an important managerial function.

There are several reasons someone might make capital purchases in a dental practice. When buying an existing practice, the person buys the assets of the practice. These may be hard assets (such as dental equipment) and soft assets, such as goodwill and ongoing concern value. The equipment will need to be replaced in a practice periodically as older equipment wears out. A facility might need to be modernized as newer equipment and technology becomes available. An existing facility might need to be expanded. Each of these should be done with a definite plan and timetable for paying for them.