Question
Today is 1 January 2017. John is a 65-year-old retired financial modeller and wants to move into a retirement village. To live in a retirement
Today is 1 January 2017. John is a 65-year-old retired financial modeller and wants to move into a retirement village. To live in a retirement village, John needs to pay an ingoing fee, ongoing fees and an outgoing fee.
? The ingoing fee is the amount a retiree needs to pay upfront to live in a retirement village and is sometimes called an entry fee. Usually the ingoing fee will be returned to the retiree when the retiree leaves the retirement village.
? The ongoing fees are the maintenance fees a retiree needs to pay on a regular base (e.g., weekly, fortnightly, monthly or quarterly.).
? The outgoing fee is the exit fee the retirement village will charge when retirees leave the retirement village. The outgoing fee, which is also known as a deferred management fee, is usually expressed as a percentage of the ingoing fee, or the resale value, of the retirement village unit. The outgoing fee is usually a capped step function which steps up over time. For example, a retirement village can charge a outgoing fee 5% per year based on the ingoing fee with a fee period over 6 years which steps up to a maximum percentage of 30% = fee rate per year x fee period. If the ingoing fee is $1,000,000, then in this example a retiree who chooses to leave the retirement village after one year has an outgoing fee of $50,000 = $1,000,000 x 5% x 1; a retiree who chooses to leave the retirement after two years has an outgoing fee of $100,000 = $1,000,000 x 5% x 2; a retiree who chooses to leave the retirement after six years or more than six years (e.g., seven years, eight years, etc.) has an outgoing fee of $300,000 = $1,000,000 x 5% x 6
John now has two choices of retirement village, Happy Retirement (HR) and Sun Village (SV). The detailed information of these two retirement villages is stated in table 2 below. The ingoing fee paid to these two retirement village will be returned to John when he leaves the retirement village. Meanwhile John needs to pay the outgoing fee when he leaves the retirement village. The interest rate is assumed to be ji2 = 6% p.a. Based on this assumed interest rate, John has built an Excel spreadsheet (see table 2) to calculate the current present values of the net costs and the equivalent monthly cost (fixed monthly cost paid at the end of each month) to a resident in HR and SV if he stays in the retirement village for either 2 years, 4 years or 10 years. The net costs are calculated based on the present values of the elements which include ingoing fees, ongoing fees and outgoing fees, with the return of ingoing fees being subtracted .
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started