Solved: Losrock Housing Association is considering the

implementation of a refurbishment
Losrock Housing Association is considering the implementation of a refurbishment

Losrock Housing Association is considering the implementation of a refurbishment programme

on one of its housing estates which would reduce maintenance and heating costs and enable a
rent increase to be made.

Relevant data are as follows:

(i) Number of houses: 300.

(ii) Annual maintenance cost per house: £300. This will be reduced by 25 per cent on
completion of the refurbishment of each house.

(iii) Annual heating cost per house: £500. This will be reduced by 30 per cent on completion of
the refurbishment of each house.

(iv) Annual rental income per house: £2100. This will be increased by 15 per cent on completion
of the refurbishment of each house.

(v) Two contractors A and B have each quoted a price of £2000 per house to implement the
refurbishment work.

(vi) The quoted completion profiles for each contractor are as follows:

(vii) Contractor A requires £100 000 at the commencement of the work and the balance of the
contract price in proportion to the number of houses completed in each of years 1 to 3.
Contractor B requires £300 000 at the commencement of the work and the balance of the

contract price in proportion to the number of houses completed in each of years 1 to 3.

(viii) An eight-year period from the commencement of the work should be used as the time
horizon for the evaluation of the viability of the refurbishment programme.

Assume that all events and cash flows arise at year end points. Savings and rent increases will
commence in the year following refurbishment. Ignore taxation.

Required:

(a) Prepare financial summaries and hence advise management whether to accept the quote

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 from contractor A or contractor B in each of the following situations:

(i) Ignoring the discounting of cash flows; and

(ii) Where the cost of capital is determined as 14 per cent.

(b) For contractor A only, calculate the maximum refurbishment price per house at which the
work would be acceptable to Losrock Housing Association on financial grounds using
discounted cash flows as the decision base, where the initial payment remains at £100 000 and
the balance is paid in proportion to the houses completed in each of years 1 to 3.

(c) Suggest additional information relating to maintenance and heating costs which might affect
the acceptability of the existing quotes per house where discounted cash flows are used as the
decision base.

Losrock Housing Association is considering the implementation of a refurbishment

ANSWER
https://solvedquest.com/losrock-housing-association-is-considering-the-implementation-of-a-
refurbishment/

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