The IRT is a not-for-profit (NFP) organisation which is a large provider of residential aged care (and ancillary services) which has operated in the market across its footprint in the Illawarra and surrounds of the south coast of New South Wales (NSW) since 1969. IRT is one of the largest providers in NSW and is currently ranked overall as the 20^th largest provider in Australia in terms of the number of residential age care places available. Data shows that over the past 5 years IRT has achieved annual compound growth of 2% in the number of residential places offered (KPMG, 2022, p.14). 

 

The Board of the IRT are concerned that the growth in residential places that it offers does not meet the growth in demand for places in the region where it operates. This concern is also in the context that some of the IRT's older residential aged care sites (now between 30 and 50 years old) need to be refurbished and/or replaced to meet the changing acute needs of aged care residents. 

 

In order to better understand the changing post-pandemic demographics in the regional towns it services, and the resultant changing aged care needs, the IRT recently commissioned a report which comprehensively researched future residential aged care needs. The report identified a gap in the market in the area surrounding Shoalhaven on the NSW south coast and recommended that an aged care facility be constructed there

 

Ms Rosemary Cutting, the IRT head of Planning and Development, plans to submit to the Board a proposal propagating the planned 150-room 'Shoal Gardens' development for Shoalhaven. Ms Cutting has asked you to prepare the financial evaluation of the proposal for inclusion in her presentation to the Board. 

 

Besides the expenditure of $300,000 for the market research report, it is planned that the new facility be constructed on a 20-hectare site which was purchased in Shoalhaven by the IRT in 1984 for AUD$1.2 million. This land was recently valued in the IRT 2022 financial statements at $7.5 million, however a recent offer for the property of $8.5 million was received from a residential developer wishing to create a new housing estate. Construction is expected to take 3 years and new residents, and initial positive cash flows, will commence in YR 4 of the project. It is expected the facility will achieve 50% occupancy in YR 4 and 90% occupancy in Yr 5 (its budgeted maximum occupancy). When completed at the end of YR 3 it is expected that the facility will have a useful life of 20 years. 

 

Estimates of expected revenues and expenses for the project are as follows:

 

Year	$ Cash Flow	Description
0	-200,000	Council Planning Permits
1	-2,000,000	Completion of ground works
1	-15,000,000	Initial Construction
2	-30,000,000	Finalise Construction
2	-500,000	Initial Marketing Campaign
3	-15,000,000	Complete fit out and gardens
3	-500,000	Staff Recruitment
3	-1,000,000	Marketing for Opening
4	30,000,000	Residential Refundable Deposits Received (est $400k @ 50% occupancy)
4	2,250,000	Daily Fees residents (est $30k per head @ 50% occupancy)
4	-3,500,000	Facility Operational Costs
4	-1,250,000	Facility Maintenance Costs
5	24,000,000	Residential Refundable Deposits Received (est $400k per head @ 90% occupancy - 40% increase)
5	4,050,000	Daily Fees residents (est $30k per head @ 90% occupancy)
5	-2,500,000	Facility Costs

 

Management estimate that the average management fee per resident will be 30% of residential deposits held every 5 years. The balance of residential deposits are expected to remain constant with deposits from new entrants to keep pace with refunds to departing residents. Estimated refunds of deposits required at termination is $37.8 million. The property is estimated to have a cash value of $80 million at the point of decommissioning in 24 years.

Whilst IRT is a NFP and pays no taxes the organisation uses a 15% discount rate on new projects to ensure the effective and efficient use of assets. Using the NPV approach, advise Ms Cutting whether the project should be undertaken. Show all workings. provide proper inflow,outflow and netflow then npv with proper formulas and working

Please provide proper inflow , outflow and netflow

Answer rating: 100% (QA)

To determine whether the project Shoal Gardens should be undertaken we need to calculate the Net Present Value NPV of the project using a discount rat... View the full answer