Analysis of Blueberry Acres Ten Year Budget - Assignment Example

? Analysis of Blueberry Acres Ten Year Budget Analysis of ten year budget The budget for the 10 year projections are reasonablein some areas and unreasonable in others. The assumptions leading to the figures relating to the following areas have been found to be reasonable. i. The revenue per unit for the 53 assisted living facility unit of $2700 per month is less than the median monthly rate of $3,710 for the State of California (Genworth 2013). However, the minimum rate that exists in California is $933 (Genworth 2013). The monthly, median rate when translated into monthly and annual figures at full occupancy levels - $44,520 and $2,359,560 appears reasonable when the average occupancy rates are applied of approximately 88% for the third quarter of 2013 is applied to it. ii. The wages are in accordance with the Federal minimum wage which is $7.25 per hour – the lowest pay rate offered by the company. Although, the last minimum wage increase in California was in 2008 when it increased to $8 the Federal minimum wage remained at $7.25 per hour (Bernstein 2013). Both rates are expected to increase in the near future if the Governor and the President have their way to $10 per hour n 2016 (Bernstein 2013). iii. The level of inflation which is set at 3% for expenses is considered fair as it is close to the projected inflation rate. iv. The company took liability insurance into account even though it is not a requirement in California at this time. This is an indication of the importance it places on this issue. The areas which appear unreasonable relates to vehicle expenses, amounts omitted and the amortization period for the loan. These are outlined as follows: i. Motor vehicle expenses are assumed to remain constant from one year to the next. This is highly unlikely to happen since the Consumer Price Index (CPI) for 2013 indicated that license fees and the cost of maintaining a vehicle both increased (BLS 2013). ii. The amortization period for the loan is projected at 25 years. This equates with the depreciation period of 25 years on the building. It is highly unlikely that the lender would want to wait until the asset for which the loan is intended is at the end of its useful life before the loan repayment period expires. iii. All Assisted Living Facilities in the State of California are required to be licensed on an annual basis. The initial fee is a maximum of $1,500 for the first year and $750 each year for renewal in the future. This fee although immaterial was not considered. However, small it could mean the difference between a profit and a loss Contract for Construction The contract for construction indicates that the project would be registered as a limited liability company (LLC). This means that the company and not the contractor would be liable for damages resulting from the project. This also suggests that the contractor would be free of liabilities to anyone and that his liability would be limited to his investment in the project of $100,000. Furthermore, the suggestion that the other investors will have no say is unreasonable as it means that the general contractor is responsible to no one and will be able to do as he pleases. There is a conflict of interest and the contractor needs to face any consequence resulting from his mismanagement of the project. There is nothing in the contract about retention monies or the consequences of failure to complete the project on time. These are important issues that need to be addressed in any construction contract. In fact, the suggestion that the project will only start when all monies are received without consideration of the time value of money and the cost of delays are ludicrous and needs to be reconsidered. Analysis of the Anticipated Rate of Return The rate of return as calculated by the return on capital employed (ROCE) will be negative in the first four years and less than 1% in year 5 and 6. However, the return increases to 1.95% in year 7; 2.73 in year 8; 3.44 in year 9; and 4.42 in year ten. This trend is expected to continue into the future. In comparison the coupon rate on ten year US government bonds which is considered to be risk free stands at 2.5% (Bloomberg, 2013). Additionally, the interest rate on certificates of deposit (CD) is 1.90% APY (FindRates.com, 2013). The ROCE of the business should be able to outperform both instruments as business picks up and the interest expense on the loan is reduced. The General Contractor as General Manager There is definitely a conflict of interest with the General Contractor serving as General Manager. In fact, the project should be put to tender to determine the most reasonable and experienced bidder. The contractor is expected to have experience in the construction of Assisted Living Facilities. This will help to reduce the number of problems that are normally encountered in projects of this magnitude. If the general contractor is only responsible to himself as general manager then he will make all the decisions and ratify them at the same time since none of the other investors would have a say in the decision making process. Types of Insurance and their Importance Insurance is necessary to ensure that the LLC recover from losses resulting from accidents that take place on the company’s property. These accidents may involve employees in the process of performing various tasks as well as visitors and clients. Dong et al (2009, cited in Latief et al 2011) indicates that between the years 1992 and 2006 fall accidents which is the most frequently occurring accidents on construction projects account for 32 per cent of fatality overall. This level of fatality translates to 37 per cent of all deaths in the construction industry (Kaskutas et al 2009, cited in Latief et al 2011). This is indicative of the importance of employee compensation and limited liability insurances in relation to construction projects. Property insurance is also important as it covers the building while under construction and when completed. This means that any damage to property for any reason will be compensated for once the insurance coverage is adequate. Evaluation of Investment The investment is a good one if managed properly. The elderly population is expected to increase significantly in the next 30 to 40 years. Howden and Meyer (2011) indicate that between 2000 and 2010 the 62 years and over age group segment of the population increased by 21.1 per cent. Additionally, the percentage of that group as a proportion of the population increased from 14.7 per cent to 16.2 per cent. Furthermore, the older ages of groups recorded faster rates than the younger age groups with the baby Boomers in the 46 to 64 age group – which includes two five year groups with the highest growth rates (Lindsay and Julie 2011). This is suggestive of a bright future and increased business for operators of Assisted Living Facilities. . Appendix Computation of ROCE - Year 1 to Year 10 Description Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Net Income as per Budget (988,452) (152,732) (115,101) (75,457) 35,927 85,116 137,015 191,766 249,519 310,430 capital Invested:                     land 250,000                   Investors' Contribution 1,000,000                   Loan and Costs for Construction 5,512,451                   Equipment 259,978                   Total Capital Employed 7,022,429                                         ROCE (%) -0.14 -0.02 -0.02 -0.01 0.01 0.01 1.95 2.73 3.55 4.42 References Bernstein, S. (2013). California to raise minimum wage to $10 an hour by 2016. Retrieved from http://www.reuters.com/article/2013/09/25/us-usa-california-minimumwage-idUSBRE98O0U920130925 Bloomberg (2013). United States Government Bonds. Retrieved from http://www.bloomberg.com/markets/rates-bonds/government-bonds/us BLS (2013). Consumer Price index - August 2013. Retrieved from http://www.bls.gov/news.release/pdf/cpi.pdf FindRates.com. (2013). Highest California CD (Certificate of Deposit) Rates. Retrieved from http://www.findrates.com/cd-rates/CA-California.php Genworth (2013). Genworth 2013 Cost of Care Survey. Retrieved from https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_032213_Cost%20of%20Care_Final_nonsecure.pdf Latief, Y., Suraji, A., Nugroho, Y.S., and Arifuddin, R. (2011). The Nature of Fall Accidents in Construction Projects: A case of Indonesia. International Journal of Civil & Environmental Engineering, 11(5), p. 92 - 99 Lindsay, M and Julie, A. (2011). Age and Sex Composition: 2010. Retrieved from http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf Read More