FINAL WORK: ASSISTED HOTEL

Files of interest:
1. Quality standards for long-stay facilities (SENAMA) (points to be considered to
elaborate value proposition, minimum requirements):
http://www.senama.gob.cl/storage/docs/Estandares_Calidad-ELEAM_WEB.pdf
2. Older adults in figures (INE summary, according to census 2017):
https://www.ine.cl/docs/default-source/publicaciones/2018/adultos-mayores-en
-cifras-censo-2017.pdf?sfvrsn=4
3. Population projections according to major age groups for 2050 (INE, December
2018):
https://www.censo2017.cl/descargas/proyecciones/sintesis-estimaciones-y-pro
yecciones-de-la-poblacion-chile-1992-2050.pdf
Introduction:
National statistics show that the elderly population of Chile is around 15% of the country's
total population, something like 2.5 million people. Health problems and possible mishaps
that may occur when over 70 years of age are some of the factors why some people choose
to take an alternative care for the elderly.

According to international data (Mortality Related Factors of the American Association of

Long Term Care Facilities for the Elderly), life expectancy at age 60 is reduced by 75% in
those who require care. According to the same study, the mortality rate among people who
are institutionalized is between 50% and 60% during the first year.

In our country, the residents of the ELEAM SENAMA (organization dedicated to the care of
the elderly, from its acronym, Establecimientos de Larga Estadía para Adultos Mayores) are
elderly people with moderate and severe dependency, with high social vulnerability. Hence
the effort and commitment that exists in the institution to provide long-term care that
safeguards the rights of the elderly.

The average age at entry of the residents is 78 years old. In addition, people are in the most
vulnerable 60% of the population according to the Social Household Registry and without
effective support networks.

According to information provided by SENAMA (National Service for the Elderly), the cost of
maintaining an elderly person depends on the hotel service, facilities and care that a nursing
home may have.

In terms of prices, there are nursing homes for all budgets, ranging from foundations and
hospices for the value of the pension of the elderly (Las Rosas Foundation, Hogar de Cristo
and San Vicente de Paul) that have sufficient facilities to provide recreational spaces and
basic care, to alternatives that can be considered for socioeconomic level ABC1 that have
the most comfortable and pleasant.

Prices range from $400,000 to $1,500,000 per month, which includes basic care, group
therapies, all meals, laundry, nurses, own or shared rooms, private bathrooms. etc.

In SENAMA's ELEAMs, the average age of admission of residents is 78 years old. In

addition, people are in the most vulnerable 60% of the population according to the Social
Household Registry and without effective support networks.

For our study, considering this information regarding the elderly, we considered the
opportunity to help this business niche by evaluating a project associated with the
construction of a home for the elderly of medium/high category with respect to the
establishments that the government has throughout the country.

In the following table, information compiled from the CASEN 2017 report, it can be seen that
the Los Lagos region is a region where the number of people considered within the range of
elderly exceeds the national average, for this reason we believe that it is an opportunity to
develop this work in an area that requires a greater number of units intended for the care of
the elderly.
Questions:

1. Define a strategic location within the city to develop the project. The main advantages
and disadvantages of this location for the project should be pointed out. Also point out
the socio-demographic advantages of the area and positive aspects of the country
that could benefit the project.
- This means that a strategic and market study must be carried out. This part is
equivalent to 20% of the project grade.

The site chosen for the project is located in the Los Lagos region, in the province of
Llanquihue, in the city of Puerto Montt. The reason for the choice of this location and the
project strategy is evident from the SWOT analysis below:

SWOT:

1. Strengths:
• The chosen area is an area that, although its climate could cause some
inconvenience to people due to the amount of rainfall during the year, it is also true
that the places provide a sense of tranquility to people, which in our case is what is
sought for the good rest of the elderly.
• Although the cities near the future facility (Puerto Montt, Puerto Varas, Llanquihue,
Frutillar) are a few kilometers away from the main center of the region, the city of
Puerto Montt, due to its proximity to the main hospitals, we believe that the travel
times still make it possible to travel comfortably in the event of a major health problem
that requires transferring the person in question to a hospital.
• The low number of private establishments for this exercise makes it more viable for
demand to be met more easily than in larger cities.
• On the other hand, after concluding the projected time, there is the option of selling
the property as a tourist hotel. Puerto Montt is the distribution center for many visitors
who then go on to the wonderful tourist destinations that abound (5).

2. Weaknesses:

• Our work is mainly oriented to elderly people from a more or less well-to-do economic
situation. In general, for people in the area, families take care of their elderly in their
own homes, which reduces the number of potential lodgers. This means that people
who are able to reach these establishments are housed related to people who came
to the area for work and who are forced to move their older relatives so that they are
not too distant from them in the event that they cannot take care of themselves.
• Currently, the cost of land in the area of Puerto Varas and Frutillar has been one of the
major drawbacks when looking for a place where the investment is reasonable with
respect to the planned building.

3. Threats:
 • Existence of regulations: regulations for long-stay facilities for the elderly (MINSAL).
This requires authorization from the regional ministerial health secretariat in order to
operate. It also establishes minimum requirements to be able to offer the service,
related to facilities, personnel, operation and supervision(1).
• On December fourteenth, 2018, the Chamber of Deputies approved a bill to give more
supervisory and control powers to SENAMA with respect to long-stay facilities(2).

4. Opportunities:

• The demand for this type of services is expected to grow continuously until 2050, as a
result of the accelerated aging of the Chilean population (3).
• Creation of 14,000 jobs in the Lakes Region during 2018, encouraging families to
migrate to the interior of the region in order to find stability and a better quality of life.
Ultimately, this translates into an increase in population in the cities near the project. In
addition, it is worth noting that the region has the lowest unemployment rate in all of
Chile, at only 3.9% during 2018 (4).
• Low competition due to the lack of long-stay facilities for the elderly compared to other
regions of Chile. More specifically, there are only six official establishments of this type
in the entire province of llenquihue, and most of them have deficient infrastructure, little
variety of services and a scarce number of specialized professionals (nutritionists,
kinesiologists, etc.).

Strategy: A strategy is formulated to provide a quality service, with the help of professionals
from different health areas, with better infrastructure, a variety of services and complying with
all the requirements established by MINSAL.

(1) https://www.minsal.cl/sites/default/files/files/DTO-14_05-AGO-2010_ELEAM.pdf
(2)https://www.adprensa.cl/cronica/camara-aprueba-proyecto-para-aumentar-fiscalizacion-y-
sanctions-for-elderly-homes/#
(3)https://www.ine.cl/docs/default-source/publicaciones/2018/adultos-mayores-en-cifras-censo-2017.
pdf?sfvrsn=4

(4)https://www.cooperativa.cl/noticias/pais/region-de-los-lagos/los-lagos-creacion-de-14-000-empleo
s-keeps-the-region-with-the-best/2018-09-29-29/153835.html.
(4)https://www.biobiochile.cl/noticias/nacional/region-de-los-lagos/2018/12/31/los-lagos-registro-una
-unemployment-rate-of-39-according-to-ine-report.shtml
(5)https://www.soychile.cl/Puerto-Montt/Sociedad/2018/11/18/567452/Estudio-revela-prefere
https://www.soychile.cl/Puerto-Montt/Sociedad/2018/11/18/567452/Estudio-revela-prefere
ncias-por-Puerto-Montt-en-turismo.aspx

· . Calculate free cash flows: You should use as realistic values as possible (explaining
the sources used when applicable) for inflation, tax rate, depreciation, etc. You may
conduct a preliminary market study to establish a price for the service. Forecast the
demand, the costs of operating the assisted hotel, and also the investment.

The following table shows an extract of the free cash flow calculation, which has a time
horizon of 10 years, considering a terminal value in year 10. The table is in thousands of
pesos.

Description Year 0 Year 1 Year 2 Year 3 (...) Year 10

(+) Operating Income $ 302.400 $ 332.640 S 365.904 S 713.043
(-) Operating Costs $ 85.113 $ 93.624 $ 102.987 $ 200.692
(=) Operating Margin S 217.287 $ 239.016 S 262.917 S 512.351
(-) Administrative and selling expenses $ 202.083 $ 208.550 S 215.223 S 268.316
(-) Research and development $■ S - $- $■
(=) EBITDA $ 15.204 $ 30.466 S 47.694 S 244.035
(-) Depreciation $ 28.080 $ 28.080 S 19.870 S 19.423
(=) EBIT -$ 12.876 $ 2.386 $ 27.824 $ 224.612
Tax loss carryforwards $- -$ 2.386 -$ 10.489 $-
Taxable income N/A N/A $ 17.335 $ 224.612
(-) income tax 27% (-) income tax $- I - S 4.680 S 60.645
(=) Income after taxes -$ 12.876 $ 2.386 $ 23.144 S 163.967
(+) Tax depreciation $ 28.080 $ 28.080 S 19.870 S 19.423
(-) Initial investment S 361.159 $■ s - $■ $■
(-) Increase in CTN $ 11.064 $ 1.086 $ 1.195 $ 2.329
(=) Free Cash Flow $ 4.140 $ 29.380 $ 41.819 $ 181.061
(+) Terminal Value $- S - $- S 9.053.051
(=) Total Free Cash Flow $ 4.140 $ 29.380 $ 41.819 $ 9.234.112

The following is the detail by row of the free cash flow calculation:
· (1) Revenues from operations: calculated on the basis of an estimated demand of 21
adults
major. This estimate was based on the identification of unsatisfied demand by
families that require a quality service and excellent infrastructure for their families.
The rate of increase in the value of the service per year of 10%, which includes
inflation and price changes, was considered. The price estimate was obtained after
consulting several similar luxury establishments in Santiago, which ranged from
800,000 pesos to 1,500,000 pesos. Given the conditions of this facility, the price was
set at 1,200 thousand pesos per senior citizen.
· (2) Operating costs: these include food, potable water, electricity, cable, Internet, gas
and cleaning supplies. costs were determined based on demand. costs are estimated
to increase by 10% annually, which is already reflected in the cash flows for each
year.
(4) Administrative and sales expenses: include staff salaries, which include four
nursing technicians, a nutritionist, a kinesiologist, an occupational therapist, an
occupational therapist, a medical professional, a nurse, two food handlers, three
guards, a general clerk, an administrative secretary and the monthly fees of an
accountant. salaries increase by 3.2% annually, based on changes in the CPI. The
cost of salaries was obtained from the website mifuturo.cl which indicates the average
salary of professionals of this type in Chile.
(5) Research and development: there were no such expenses after the date of the
decision to build the hotel. Therefore, all previous investigations will be considered
sunk costs.
(7) Depreciation: depreciation is subtracted from the initial investment to show the
effect of the tax benefit it produces. For this purpose, tax depreciation was considered
according to the table of useful life on fixed assets of the Internal Revenue Service.
The accelerated depreciation regime was used since, according to the income tax law,
 the project meets the requirements for its use (for new companies, effective capital of
less than 30,000 UF). In summary, assets related to construction were given 7 years
of useful life, furniture and other smaller items, between 2 and 3 years of useful life,
and miscellaneous facilities (water, gas, electricity, etc.) 3 years of useful life.
(9) Income tax: The income tax of article 14 A of the income tax law is considered, on
attributed income regime, which considers for the tax year 2020 onwards a 27% tax
rate. As can be seen in the lines above this one, the effect of the tax loss carryforward
from the first years was considered, generating that in years 1 and 2 no taxes are paid
for this concept.
(11) addition of depreciation: the tax depreciation is added back, since financially it
is not a real cash outflow, only the action of discounting it is performed to consider the
tax benefit it generates.
(12) Initial investment: the initial investment in year 0 is discounted. The calculation
of the initial investment, which includes land, hotel construction and miscellaneous
facilities, was obtained from the professional advice of one of the project partners.
(13) increase in CTN: For this purpose, a petty cash equal to 200,000 for all years
was considered. In addition, accounts receivable and accounts payable of 5% of
revenues and costs, respectively, were considered, based on the collection of
information from similar companies.
(15) Terminal value: Since the life of the project is projected to be very long, it was
decided to calculate a terminal value for year 10. For this purpose, an increasing
perpetuity was calculated on the cash flow of year 10, with a growth of 10% over the
predetermined values.
3. Determine an appropriate discount rate for the project, calculate the NPV, IRR and
payback of the project. Is the project profitable?
• Determine a discount rate for this type of project (Feel free to use reasonable
assumptions to simplify this value) (5% of grade)
• Calculate at least these 3 economic indicators (10% of the grade)
• Commenting on the values obtained (5% of the grade)

The discount rate or cost of capital of the investment is the mechanism by which the
projected cash flows of the project are brought to present value. For this work, the CAPM
method was considered to find the discount rate to be used in the assisted hotel, which is
mainly decomposed into two parts: a risk-free rate and a market risk premium. The formula
and calculation of the discount rate for the evaluated project is presented below:

R = Rf + ß ( Rf Rm ) → 17.903%= 2.8% - 85% ( 2.8% - 20.57% )

RF corresponds to the risk-free rate, a rate of return to which is associated the lowest risk
within the country, in this case, Chile. In order to calculate it, the IRR of a bond of the
Treasury General of the Republic was used, specifically the BTU0300120 bond, which
corresponds to a ten-year bond in UF. This bond was chosen because of its proximity to the
time horizon of the project. No central bank bonds were used because none are being traded
at this time. For the calculation of the Rm, which corresponds to the market return (Chile), the
IPSA indicator was used. The profitability of the indicator was calculated from January 2016
to May 2019 (this due to the fact that the profitability of 2018 and so far in 2019 of this
indicator was negative) which resulted in 20.57%. Finally, for the calculation of Beta, which
corresponds to the systematic risk exposure, it was obtained from the "Damodaran Online"
website (which is a tool that compiles information on many companies in the world and their
betas), specifically in "levered and unlevered betas by industry", "Emerg Mkt". the industry
chosen is "hospitals/ Healthcare facilities" as it was found that several nursing homes in
various countries are classified in this industry, some examples: Five Star Senior living inc.
and Sienna Senior Living Inc.
It should be noted that the use of debt was not considered for this project, so the equity cost
rate calculated above is equal to the WACC rate of the project.

After calculating the discount rate, the NPV, IRR and PAYBACK were calculated. A summary
table is presented below:

Method: VAN IRR PAYBACK PAYBACK Discounted

Result: $1.660.454.026 42% 6 years 13 years

Analysis of methodologies:
· The NPV generated a positive value of $1,660,454,206, which means that the project,
according to the estimated variables, is profitable and therefore it is advisable to do it.
· The IRR refers to an indicator of profitability, it is the rate of return of the project
during its operation. For this case, an IRR of 42% was projected, which is good since
it is much higher than the discount rate used by the NPV, which means that the
project is profitable. It should be noted that due to the characteristics of the project
flows, the IRR calculation should not present any problem (since there is only one
negative flow and then all positive flows in order and there are no large investments
after the first flows).
· PAYBACK, which refers to the time it will take the hotel to recover the initial
investment, is six years, which is a short period of time given the characteristics of the
project. The project's cash flow becomes positive in the sixth year with a value of
$28,511,936.
· The discounted PAYBACK, which is the same as the normal PAYBACK but with the
difference that the time value of money is considered, is thirteen years, reaching a
value of $7,632,455 positive for that year. At year twelve this value is negative.

In conclusion, due to the results of the four methodologies presented above, which were
positive and encouraging, it is recommended to carry out the project, since it is profitable and
it is possible to recover the investment in a reasonable time. Remember that this conclusion
is based on the best estimates according to the market study, which may vary. For this we
proceeded with the sensitivity analysis.

4. Identify at least three important variables and perform a breakeven and sensitivity
analysis. What is the most sensitive variable in your model?
- A sensitivity analysis of at least 3 variables should be performed. To do this they
can run different scenarios or simulations, and see how these affect the
financial indicators. Then, indicate which are the most important. (10% of the
grade).
The three most important variables are the calculated discount rate, price and number of
hotel occupants. the break-even points of each variable were modified separately
(unidimensional analysis) in the best of cases; therefore, we start by establishing the
maximum profitability of the project.
Variations are made to the discount rate, number of occupants and price charged variables.
The discount rate is increased from 17.09% to 42.31%, resulting in a positive NPV. then the
value becomes negative.
The number of occupants showed a working range of up to 14 interns in relation to its total
capacity (21 occupants), which could generate 33% of idle capacity to keep the project
profitable.
The established price presented a decrease of up to 25% with respect to a positive NPV and
under ideal conditions.
Based on the analysis, the most sensitive variables are the number of occupants and the
price charged for lodging services.

A scenario analysis is performed through a Monte Carlo simulation of these variables under
10,000 different scenarios, where 0 hotel stays and an approximate variation of 30% in the
price are considered. Under these parameters, a probability of 45.96% of obtaining an NPV
greater than 0 with a 95% confidence level of the simulator is obtained.

5. Identify at least two flexibilities that you believe are important to the project. Analyze
them and if possible quantify them.

- Identify what actions I can take today so that my project can react and adapt
quickly to different situations. It is not the same as a sensitivity analysis. (10%
of the grade)

While the analysis of NPV, IRR, PAYBACK and sensitivities help to generate a forecast of
how the project will turn out in the future, it is always appropriate to evaluate flexibilities to
quickly accommodate abrupt changes in results. The idea of the flexibilities detailed below is
to maximize profits or minimize losses due to unexpected changes in variables that are not
controllable.

The flexibilities to be evaluated for the assisted hotel project are:

1. Expansion option, in case future demand increases more than expected.
2. Abandonment option, which considers the sale of the establishment as a residence or
tourist hotel in the event that future income is not sufficient, leaving the NPV in
negative values.

To quantitatively evaluate the flexibilities, a tree diagram will be used, which is presented
below:
Case 1: Given that the project is implemented, demand increases and the hotel expands to
year three. For this case it is assumed that the demand increases from the third year to 35
people, which generates an investment of -73,040,000, which considers the construction of
14 new pieces and all the furniture involved. In addition, operating costs and administrative
and sales expenses also increase at a cost corresponding to that of 35 people per year 3.
The Van of this option corresponds to $3,727,801,135.

Case 2: Since the project is carried out, demand increases and the hotel is not expanded.
The van of the project is the same as in the initial situation with no changes, with a value of
$1,660,454,026.

Case 3: As the project is implemented, demand decreases and the hotel is sold in year three.
It is projected that in year three the hotel can be sold for $400,000,000, based on its
characteristics and location. In this case, it is projected that the demand was always 12
people, from year one to year three, the year in which the facility is sold. Revenues and costs
are modified according to the demand of 12 people. the NPV of this case is -$280,911,532.

Case 4: Since the project is implemented, demand decreases and the hotel is not sold. As in
the previous case, demand was and will always be projected to be 12 people. Since the hotel
is not being sold, the free cash flow is calculated for the 10 years, according to the time
horizon of the project. The NPV of the project for this case is $- 372,491,305.

6. Finally, draw up a conclusion and give a final recommendation to the company.

- Conclude on the basis of everything mentioned in the report. The
recommendation of what to do should be clearly stated. (10% of the grade)