1) Smiths are researching retirement communities. They have= $2M invested in CD's earning 5%. They are Jenners Pond and Kendall Crossing. Each community needs payment of the entrance fee and monthly service fees. Entrance fee is paid in 2 instalments: 10% on October 1 2013 and 90% when they move in on March 1, 2014. They remain in cottage for 11 years at which time they move in with their son and daughter in law. The main financials for each community are given below:
Jenners Pond: Cottage entrance fee is= $400,000 Monthly service fee is= $2,900, meals= $124 per person per month. Service fees rise by 4% per year effective 10/1/xx. Refund equal to 50% of present market value of cottage is paid to vacating residents or their heirs. Market value has increased 5% for 5 out of past 11 years on alternate years. Assisted living costs= $5,000 plus present service fee minus a 20% discount for remaining cottage occupant.
Kendall crossing: cottage entrance fee is= $500,000 monthly service fee is= $4,000, meals are included. Annual rises average 3.5%. Refund of 80% of entrance fee is paid upon vacancy after eight years of residency. Assisted living costs same as independent living.
i) What is the net cash flow for Smiths after eleven years for Jenners Pond and Kendall Crossing? How would you explain difference in net cash flow?
ii) Determine the net present value of each community by using the Smith's market rate?
iii) How would your reply change if one of Smiths had to move to assisted living after eight years?
iv) Apply one other valuation method to situation.