Since it was founded, the facility has been operating very well. However, the facility has had ups and downs in terms of its financial situation. The financial position of Pentat Elderly Home has not been stable because it depends on donors and personal contribution from the founders. Because of the financial difficulties the facility is facing, it lacks a proper marketing strategy, and this makes it less famous. Since it is not known by many people, most of the beds in the facility are unoccupied. In addition, the facility is not well equipped with facilities because of the financial hurdles it is facing. Treatment facilities, diagnosing facilities, and other related equipment are expensive.
The facility also has a shortage of nurses and most of the nurses available work on a part-time basis. Thus, the elderly in the facility does not receive continued care. This is because the operational costs outweigh the income generated by the facility, leading to some expenses, such as wages being difficult to meet. Because of this, the permanent nurses end up being subjected to go for leaves, leaving the facility with no reliable caregiver. Currently, the facility operates on a deficit of $25,000, which need to be met by the end of the second quarter of the 2019/20 financial year.
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Balance Sheet for Pentat Elderly Home
| Balance Sheets | ||||||
| As of Dec 31, 2017 and 2018 | ||||||
|
2017 |
2018 |
|||||
| Assets | ||||||
| Current Assets | ||||||
| Accounts Receivables |
$45,500 |
$21,210 |
||||
| Prepaid Expenses and other assets |
$50,455 |
$ 11,101 | ||||
| Total current assets |
$95,955 |
$32,311 |
||||
| Utility Deposit |
$40,100 |
$ 40,100 | ||||
| Property and Equipment | ||||||
| Condominium units |
$411,442 |
$411,441 |
||||
| Furniture, Fixtures, and Equipment |
$201,038 |
$188,998 |
||||
| Construction in progress |
$2,153 |
$11,997 |
||||
| Total property and equipment |
$614,633 |
$612,436 |
||||
| Less accumulated depreciation |
$265,400 |
$254,333 |
||||
| Property and Equipment, Net |
$349,233 |
$358,103 |
||||
| Amortization |
$3,777,645 |
$3,932,333 |
||||
| Total Assets |
$4,262,933 |
$4,362,847 |
||||
| Liabilities and Partners' Capital | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued expenses |
$387,444 |
$376,534 |
||||
| Deffered revenue |
$151,222 |
$159,492 |
||||
| Total current liabilities |
$538,666 |
$536,026 |
||||
| Partner's capital |
$3,820,433 |
$3,900,359 |
||||
| Total liabilities and Partner's Capital |
$4,359,099 |
$4,436,385 |
||||
Statement of Operations
| Statement of Operations | ||||||
| For the Years ended December 31, 2017 and 2018 | ||||||
|
2017 |
2018 |
|||||
| Operating Revenue | ||||||
| Resident revenue |
$5,668,345 |
$5,433,778 |
||||
| Other revenue |
$334,212 |
$329,479 |
||||
| Total operating revenue |
$6,002,557 |
$5,763,257 |
||||
| Operating Expenses | ||||||
| Labor |
$3,565,702 |
$3,467,332 |
||||
| General and administrative |
$733,884 |
$599,037 |
||||
| Food |
$401,987 |
$499,090 |
||||
| Management fees to affiliate |
$378,347 |
$296,473 |
||||
| Utilities |
$301,783 |
$282,387 |
||||
| Depreciation and amortization |
$265,932 |
$276,836 |
||||
| Insurance |
$100,633 |
$99,723 |
||||
| Advertising and marketing |
$120,763 |
$104,893 |
||||
| Repairs and maintenance |
$100,893 |
$104,463 |
||||
| Taxes and Licences |
$40,623 |
$40,873 |
||||
| Ancillary expenses |
$21,783 |
$21,666 |
||||
| Bad debt expense |
$4,321 |
($4,516) |
||||
| Total operating expenses |
$6,036,651 |
$5,788,257 |
||||
| Net Loss |
($34,094) |
($25,000) |
||||
Statement of Cash Flows
| Statement of Cash Flows | ||
|
2017 |
2018 |
|
| Cash Flow from Operating Activities | ||
| Net Loss |
($34,094) |
($25,000) |
| Provisions for bad debt |
$4,321 |
$4,516 |
| Depreciation and amortization |
$265,932 |
$276,836 |
| Changes in operating assets and liabilities | ||
| Accounts receivable |
($33,548) |
($78,673) |
| Prepaid expenses and other assets |
($39,094) |
($400) |
| Accounts payable and accrued expenses |
$16,777 |
$5,897 |
| Deferred revenue |
-13,945 |
($67,893) |
| Net cash provided by operating activities |
$166,349 |
$115,283 |
| Cash Flows from investing activities | ||
| Purchases of property and equipment |
$18,743 |
$11,983 |
| Cash Flows from Financing Activities | ||
| Distributions-Net |
$147,606 |
$103,300 |
| Net Decrease in Cash and Cash Equivalents | ___ |
($455) |
| Cash and Cash Equivalents-Beginning of year | ___ |
$455 |
| Cash and Cash Equivalents-End of year | ___ | ____ |
| Supplemental Disclosure for Noncash Item | ||
| Accrued capital expenditures | $7,874 | ($7,665) |
Performance of the Facility
Assets are the cash, equipment, and property owned by a firm for the purpose of increasing the profitability as well as a future wealth of business (Newhouse, 2019). On the hand, liabilities are bills or loan payment that are due within the next business cycle. As seen in the balance sheet, the total liabilities are higher than the total assets, and this indicates a liquidity issue. This means that the facility would be unable to pay its debts. The current ratio for 2018 is calculated below;
The rate is below the market rate, and thus, the facility has to make maximum use of its assets to generate profits. This would enable the facility to pay its debts as well as implement new changes.
From the statement of operations, the facility is also incurring losses instead of making profits. This means that the facility is not running as planned. The net losses can be as a result of an increase in operational costs while the facility is not fully operational. As stated earlier, most of the beds in the facility are uncopied because many people are not aware of the healthcare facility.
Investment Decision
The facility wants to make an investment decision to update the aging equipment. The equipment is expected to cost $1.3 million, and the expected life of the equipment is 15 years. If the projected cash flows of the investment are known, it is vital for the management to evaluate if the investment will be productive. The Net Present Value is one of the techniques used in capital budgeting to evaluate investment decisions. When the rate of return and the projected cash flows for the facility is known, the NPV of the investment can be calculated. Table 1 shows the expected cash flows and the present value (PV) of the cash flows. A rate of return of 10% was used, and the facility was projected to generate $350,000 each year.
| Investment |
$1,300,000 |
|
| Rate |
10% |
|
| Year | Cash Flow ($) | PV |
|
1 |
350,000 |
$318,181.82 |
|
2 |
350,000 |
$289,256.20 |
|
3 |
350,000 |
$262,960.18 |
|
4 |
350,000 |
$239,054.71 |
|
5 |
350,000 |
$217,322.46 |
|
6 |
350,000 |
$197,565.88 |
|
7 |
350,000 |
$179,605.34 |
|
8 |
350,000 |
$163,277.58 |
|
9 |
350,000 |
$148,434.17 |
|
10 |
350,000 |
$134,940.15 |
|
11 |
350,000 |
$122,672.86 |
|
12 |
350,000 |
$111,520.79 |
|
13 |
350,000 |
$101,382.53 |
|
14 |
350,000 |
$92,165.94 |
|
15 |
350,000 |
$83,787.22 |
| Total PV |
$2,662,127.83 |
According to the NPV rule, a business should invest in projects that have positive NPV values (Kenton, 2019). Since the NPV is positive, the facility should make the investment. Using the IRR decision criteria, the firm should invest in the project since the IRR value is greater that the required a rate of return. The IRR rule is a metric used in capital budgeting to make investment decisions. If the IRR value is greater than the required rate of return, then the firm should invest in the project.
| Year | Cash Flow ($) |
|
0 |
-1,300,000 |
|
1 |
350,000 |
|
2 |
350,000 |
|
3 |
350,000 |
|
4 |
350,000 |
|
5 |
350,000 |
|
6 |
350,000 |
|
7 |
350,000 |
|
8 |
350,000 |
|
9 |
350,000 |
|
10 |
350,000 |
|
11 |
350,000 |
|
12 |
350,000 |
|
13 |
350,000 |
|
14 |
350,000 |
|
15 |
350,000 |
| IRR |
26% |
Financing Options for the New Equipment
Since healthcare facility does not have enough cash to consider outright purchase of the equipment, it would be a necessity for the healthcare facility to choose the right business equipment financing. There is a different type of loans that are available in the make, and Pentat Elderly Home should consider one of the following financing options. Taking out an equipment loan is one of the most effective ways a firm can finance equipment purchases (National Australian Bank limited, N.d). In this financing option, the facility can get a loan for a full cost of the equipment, with the equipment itself serving as security. The facility then repays the loan with interest. Another financing option is the lease arrangement. This would allow the facility to acquire the equipment with no capital (National Australian Bank limited, N.d). The lender owns the asset and leases it to the facility for a given period as agreed on the contract.
References
Kenton, W. (2019). Net Present Value Rule. [Online]. Available at: https://www.investopedia.com/terms/n/npv-rule.asp . Accessed 17 th June 2019.
National Australian Bank Limited. (N.d). Choosing the rights financing solutions. [Online]. Available at: https://www.nab.com.au/business/moments/grow/buy-equipment/select-equipment . Accessed 17 th June 2019.
Newhouse, C. (2019). Understanding the balance sheet. [Online]. Available at: https://www.abc-amega.com/Articles/Credit-Management/understanding-the-balance-sheet . Accessed 17 th June 2019.
