CITIC Tower II Harvard Case Solution & Analysis

CITIC Tower II Case Solution

Introduction to the case

CITIC Pacific Limited has an investment opportunity which is worth HK$1.1 billion.It decided to construct a 35-floor tower, which would be available for rent in Victoria Harbor, Hong Kong.

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Hong Kong has become a service-based economy where many multinational companies and banks have regional, international centers. Moreover, approximately Hong Kong’s real estate and construction sector accounts for 25% of overall stock exchange capitalization. Furthermore, these properties are used to sell on rent to the domestic, international companies, banks and to the tourists as well.

Financial Output of the Investment

CITIC Tower II will have 35floors that will have 30% vacancy rate initially, which will reduce to approximately 5%, which is assumed as constant after one year. Furthermore, with an effective weighted average cost of capital 15%, it would provide the fair value of the investment later after 30 years. Moreover,thegrowth rate of 15% is also assumed due to the changing Hong Kong’s economy aspects, though in coming year after 2001, there would be more expected demand in the market around the 60000-70000 Sq m2 for Grade A market.

Financial Analysis

The investment is very attractive because its payback period in 17 years.Moreover,the internal rate of return shows very weak return, which could also be the result of the variations in the cash flows. On the other hand, the IRR shows that what would be the average rate of return that an investment will give yearly.

Discussion on Scenario Analysis:

In scenario A the growth rate of the 15% tax rate will be17%, whereas the profit generated will be 27% operating margin, which indicates that the company is less sensitive towards the changes in tax rates and growth rates. Inthis scenario, the company can generate NPV of $1081 with anannual change of 158 as indicated in appendix. The IRR stands at 8.35%, which shows that the reduction in IRR will generate nil NPV.

            Inscenario B, at the growth rate of 13%, the company will generate net profit margin of 35%. In addition to this, the tax rate of 13% is assumed to calculate net present value of 1280, which is highest among all scenarios. Annual change of $180 indicates that the company will have significant change in terms of value and in terms of shareholders worth. The IRR of 8.865 indicates that the company will generate reasonable return from the project.......................

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