Question

Example 6: ComfortCare Assisted Living, Inc. (CC) has a large assisted living and rehabilitation facility in Georgetown, Texas. Many of its employees have children needing daycare and/or after school care. The HR director is proposing that CC establish an onsite subsidized daycare center for dependents of CC employees. While the HR director believes this is an casy decision from an employee morale standpoint, the CFO of CC is insisting on a detailed financial proposal. The tax rate for CC is 21%. The HR director gathers the following financial information. • The center will be housed in an empty building CC already owns. The building originally cost $300,000 when built 5 years ago, but now has a market value of $450,000. The building has already been fully depreciated for tax purposes. Renovations to the building to make it an acceptable daycare will cost S100,000, and equipment for the daycare center will cost $200,000. Both the renovations and equipment have an expected useful life of 6 years . The average price for unsubsidized full day daycare in the area is $9000 per year, and after school care is $3600 annually. CC will charge employees 50% of this average price. CC anticipates averaging 100 full time children and 40 after school kids, 140 children in total • The HR director estimates that operational costs for the daycare will be 80% of the price unsubsidized daycares in the area charge. • The daycare benefit is expected to reduce annual employee tumover by 20%. Each percentage point of turnover reduction saves $8,000 in recruiting and training costs. Studies indicate that assisted living facilities that allow interaction between residents and children in onsite daycare have 6% higher rental income from senior residents. Annual rental income at CC is S6,000,000 . At the end of 6 years, the equipment for the daycare is expected to have a value of $12,000 and the building will be worth $550,000. What is the initial cost associated with this project? b. What are the annual after-tax cash flows associated with this project, for years I through S? c. What is the terminal cash flow in Year 6?

depreciation

At the end of 6 years, the equipment for the daycare is expected to have a value of $12,000 and the building will be worth $550,000.

Answer 1

a) Initial cost associated with this project will be $ 300,000, whose calculation is given below:-

• Renovation of the Building - $ 100,000
• Purchase of Day care Equipment - $ 200,000

b) Annual After Tax Cash Flows

Year 1 Year 2 Year 3 Year 4 Year 5 Particulars Revenue Revenue from full day care @ $ 4,500 / Year Revenue from after school care @ $ 1,800 / Year Increase in Rental Income 6% Reduction in recruitment and training expenses Total Revenue 4,50,000 72,000 3,60,000 1,60,000 10,42,000 4,50,000 72,000 3,60,000 1,60,000 10,42,000 4,50,000 72,000 3,60,000 1,60,000 10,42,000 4,50,000 72,000 3,60,000 1,60,000 10,42,000 4,50,000 72,000 3,60,000 1,60,000 10,42,000 7,20,000 1,15,200 50,000 7,20,000 1,15,200 50,000 7,20,000 1,15,200 5 0,000 7,20,000 1,15,200 50,000 7,20,000 1,15,200 50,000 Expenses Operational costs for full day care @ $ 7,200 /Year Operational costs for after school care @ $ 2,880 /Year Depreciation on Renovation and Equipment Market value of Equipments Total Expenses Profit Before Tax Income Tax @ 21% Profit After Tax Depreciation on Renovation and Equipment Net Cash flow 8,85,200 1,56,800 -32,928 1,23,872 50,000 1,73,872 8,85,200 1,56,800 32,928 1,23,872 50,000 1,73,872 8,85,200 1,56,800 32,928 1,23,872 50,000 1,73,872 8,85,200 1,56,800 32,928 1,23,872 50,000 1,73,872 8,85,200 1,56,800 -32,928 1,23,872 50,000 1,73,872

c) Terminal Cash Flow

Year 6 Particulars Revenue Revenue from full day care @ $ 4,500 / Year Revenue from after school care @ $ 1,800 / Year Increase in Rental Income 6% Reduction in recruitment and training expenses Total Revenue 4,50,000 72,000 3,60,000 1,60,000 10,42,000 Expenses Operational costs for full day care @ $ 7,200 /Year Operational costs for after school care @ $ 2,880 /Year Depreciation on Renovation and Equipment Market value of Equipments Total Expenses Profit Before Tax Income Tax @ 21% Profit After Tax Depreciation on Renovation and Equipment Net Cash flow 7,20,000 1,15,200 50,000 -12,000 8,73,200 1,68,800 -35,448 1,33,352 50,000 1,83,352