Cadim-China And India Real Estate Deals Harvard Case Solution & Analysis

The last investment opportunity with the Strong land was in the residential construction in Wuxi, China. The construction of residential involved 2 phases in which CADIMhad to invest 50% amount in the first phase and had the option if it would further invest in the second phase. The problem in the investment was that it would not be able to withdraw any profits until the project had ended and if it decides for not going through the second project with Strong land, then it would require in finding a new potential partner for providing investment opportunities.

 

Q.3: Hurdle Rate

The qualitative aspect of the investment portfolio suggests that company demands a certain rate of return on its investment for taking the available risk on its investment. There are two types of rate of returns which need to be taken into consideration for earning the minimum level of remuneration. Generally, the company’s net cash flows are discounted by using either Hurdle rate of IRR. The qualitative aspect of the hurdle rate suggests that if the Hurdle rate is below IRR, company’s NPV will be positive. However, if it is above IRR, then the NPV will be lower. Hence, there lies inverse relationship between IRR and Hurdle rate.

The minimum level of net remuneration or net return required by the company is 14% for its investments in real estate. The company is of the opinion to increase this return threshold by analyzing the risk appetite of all the investments. This varies from region to region such ascompany has forecasted a hurdle rate of around 18% for the novel investments in the US which is lower than the return on investments in China and India because they are riskier so, the threshold has been set to around 20% or more. But, this does not case all the time because it varies from time to time and on the basis of factors affecting the securities’ risk. There might be few projects in India and China which contains less risk appetite than investment in US securities.

Cadim-China And India Real Estate Deals Harvard Case Solution & Analysis

Q4:ATLANTIS Deal

Expected NPV and IRR of Atlantis Deal

NPV or IRR of Atlantis Deal
0123456
PV-1392.487230724.915252.015593.03978.352443.4826
Total inflows294.29188
Outflows         (139)
NPV $   155.20
IRR20.31%

 

 

 

Optimistic NPV and IRR of Atlantis Deal

0123456
PV          (139)27.80368632.648860.5424100.32482.612535.6742
Total inflows339.60539
Outflows         (139)
NPV $   200.52
IRR28.26%

 

Pessimistic NPV and IRR of Atlantis Deal

0123456
PV          (167)-76.17722-1.468441.9241139.367148.253135.747
Total inflows387.64557
Outflows         (167)
NPV $   220.76
IRR15.60%

 

FOEREAU DEAL

 

Expected NPV and IRR of FOEREAU Deal

01234
PV        (33)-15.1928.226854.83543.4092
Total inflows111.281
Outflows        (33)
NPV $ 78.04
IRR41.87%

 

Optimistic NPV and IRR of FOEREAU Deal

01234
PV        (33)-13.3910.0316759.534247.4863
Total inflows93.6611
Outflows        (33)
NPV $ 60.42
IRR30.19%

 

 

 

Pessimistic NPV and IRR of FOEREAU Deal

01234
PV        (37)-22.67424.155450.93943.9938
Total inflows96.4145
Outflows        (37)
NPV $ 59.86
IRR29.00%

 

STRONGLAND Deal

 

Expected NPV and IRR of STRONGLAND Deal

01234
PV   (36.90)11.732531.47344.124830
Total inflows47.3306
Outflows        (37)
NPV $ 10.43
IRR14.67%

 

Optimistic NPV and IRR of STRONGLAND Deal

01234
PV   (36.90)20.845535.908500
Total inflows56.754
Outflows        (37)
NPV $ 19.85
IRR30.85%

 

Pessimistic NPV and IRR of STRONGLAND Deal

01234
PV   (42.43)-23.00229.5394.1248321.3807
Total inflows32.0426
Outflows   (42.43)
NPV $(10.39)
IRR-6.62%

 

Q5: Decision with Recommendations:

After analyzing the results of NPV and IRR for all three partners using expected, optimistic and pessimistic approach, it can be recommended that company should choose theinvestment with a partner which provides highest NPV along with theminimum required rate of return requirement of 14%. The NPV of Atlantic Deal shows thehighest result of $220.76 so this should be accepted.

Moreover, it has the internal rate of return which is up to the acceptable level of at least 14% so this will be having the less risk by using the pessimistic approach. However, the Optimistic approach is showing higher IRR requirement for its inflows to be equal to its outflows. So, I would recommend the CADIM to invest in Atlantic by using Pessimistic Approach for getting highest return in terms of NPV and minimum required alevel of remuneration.

Appendices:

STRONGLAND DEAL CASH FLOW FORECAST
(All figures in millions of Chinese yuan (CNR) unless otherwise indicated: CNR7.2 = US$1)
YEAR01234
Expected Scenario
Gross Revenues    36.60    57.60      6.11
Construction Costs   (36.90)   (23.22)   (16.69)          -          -
Net Revenues   (36.90)    13.38    40.90      6.11 
          -          -          -          -
Optimistic Scenario          -          -          -          -
Gross Revenues          -    46.99    63.36          -
Construction Costs   (36.90)   (23.22)   (16.69)          -
Net Revenues   (36.90)    23.76    46.67          - 
          -          -          -          -
Pessimistic Scenario          -          -          -          -
Gross Revenues          -      0.49    57.60      6.11    36.11
Construction Costs   (42.43)   (26.71)   (19.21)          -
Net Revenues   (42.43)   (26.22)    38.39      6.11    36.11

 

 

 

 

FOEREAU DEAL CASH FLOW FORECAST
(All figures in millions of Indian rupees (INR) unless otherwise indicated: INR39.5 = US$1) 
YEAR01234
Expected Scenario
Gross Revenues           693        3,538        5,498        4,506
Construction Costs     (1,313)      (1,377)      (2,089)      (2,288)      (1,610)
Net Revenues     (1,313)         (684)        1,449         3,209         2,896
Optimistic Scenario
Gross Revenues           774        3,715        5,773        4,778
Construction Costs     (1,313)      (1,377)      (2,089)      (2,288)      (1,610)
Net Revenues     (1,313)         (603)               2         3,484         3,168
Pessimistic Scenario
Gross Revenues           493        3,538        5,498        4,706
Construction Costs            (1)      (1,514)      (2,298)      (2,517)      (1,771)
Net Revenues     (1,444)      (1,021)        1,240         2,981         2,935

 

ATLANTIS DEAL CASH FLOW FORECASTS
All figures in US $
Expected Scenario       
YEAR0123456
Gross Revenues
Ahmedabad condo         17         12          -          -          -          -
Ahmedabad Hotel          -           8         10         11         12         13
Chennai Condo       111       123       135       148       163          -
Chennai rr Park           2           4           4           5           5         56
Hyderabad Hotel          -          -           9         11         12         59
Pune Township         18         90       139       114          -          -
Total       148       236       297       290       193       128
Construction Costs          -          -          -          -          -          -
Ahmedabad condo          (5)        (11)          (4)          -          -          -          -
Ahmedabad Hotel        (14)          (1)          (5)          (6)          (7)          (7)          (8)
Chennai Condo        (38)        (95)      (124)      (136)        (50)          -          -
Chennai IT Park        (35)          -          -          -          -          -          -
Hyderabad Hotel        (13)          (3)        (12)          (6)          (7)          (8)          (8)
Pune Township        (33)        (35)        (53)        (58)        (41)          -          -
Total      (139)      (144)      (198)      (207)      (105)        (15)        (16)
Taxes          -          (1)          (6)        (14)        (28)        (27)        (17)
Net Revenues      (139)           3         32         77       157       151         95
           -          -          -          -          -          -          -
Optimistic Scenario          -          -          -          -          -          -          -
YEAR0123456
Gross Revenues          -       182       248       312       304       202       108
Construction Costs      (139)      (144)      (198)      (207)      (105)        (15)        (16)
Taxes          -          (6)          (7)        (16)        (30)        (28)        (14)
Net Revenues      (139)         32         42         90       169       159         78
          -          -          -          -          -          -          -
Pessimistic scenario          -          -          -          -          -          -          -
YEAR0123456
Gross Revenues          -         97       236       297       290       193       179
Construction Costs      (167)      (173)      (237)      (248)      (126)        (18)        (19)
Taxes          -          -          -          (7)        (25)        (26)        (24)
Net Revenues      (167)        (76)          (1)         42       139       148       136

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