CITIC TOWER II CASE Harvard Case Solution & Analysis



With the substantial ownership of 19%of Larry Yung Chi in the CITIC Pacific Limited whose shares are listed on the Hong Kong Stock Exchange in 1991, the chairman’s prime concern was the adoption of the best alternatives in order to satisfy the customers as well the other shareholders. Combining all together, the business is an excellent reflection of China’s economy.The chairman is confronted with the issue that whether the project should be undertaken or not, which requires improved balance sheet and signs despite the Asian financial crisis. With the help of the quantitatively analysis, some recommendations can be made.

citic tower ii case solution

citic tower ii case solution

Analysis of the Problem

With the help of the reliable assumptions, the quantitative analysis is performed for the given case.

Larry thought that CPL could acquire the site and develop it intoanother grade A office building in central. The asking price of the land was HK $1 Billion, andthe estimated scale of the building and development costs were comparable to those of Citictower.

Assumption Used

 In order to perform the quantitative analysis of the given case and in order to come up with the conclusion that whether Larry should undertake the project or not, some assumptions are required to be made. In order to forecast the future operating cash flows, the 30 years analysis is performed which is generally the criteria with the CPL‘s capital budgeting decision for real estate investments which typically consists of the explicit forecasting of the 10 years after the completion and the additional 20 years phase where no income growth is assumed along with the the sale of property at a price reflecting an estimate of its market value at that time. The weighted average cost of capital used in this case is 15%. The 3% growth rate is taken for the annual rental rate return. Moreover, the vacancy rate is taken as 2.90%.

Quantitative Analysis

With the help of the above assumptions, the quantitative analysis is performed in which the forecasted future operating cash flows are discounted back and the NPV, IRR and profitability index of the project are calculated.

Discounted Cash flows

By taking the weighted average cost of capital of 15%, the future forecasted operating cash flows of 30 years analysis are discounted back in order to arrive at the present value for the project which comes out to be HK $ 1.534 billion...................

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