Investor has entered in a joint venture with a property developer to develop and operate a retail center. The retail center requires a 30 million dollar investment. The partners agree that the investor will contribute 80% of the required investment, while the developer will contribute 20%. In addition the distribution of returns between the investor and the developer from operating the retail center is as follows; first, the investor receives a 8% cumulative preferred return; any remaining cash-flows are split in proportion to the original investment of the partners (80%/20%). Upon the sale of the property in year 4, the investor will first recover its contributed capital; next the developer will recover its contributed capital; any remaining cash flows are spit 50/50 between the investor and the developer. The cash flows (in MUSD) from operation and sale of the retail center are as follows:
Year 1 2 3 4
CF from operations -3.2 6.2 7.1 7.9
CF from sale 48
Find the Investors and Developers IRR
| Prefered return of investor | = | 30,000,000*80%*8% | ||||||
| = | $1,920,000 | |||||||
| Calculation of share | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | |||
| a | CF from operations | -$3,200,000 | $6,200,000 | $7,100,000 | $7,900,000 | |||
| b | Prefered return of investor (current year) | $1,920,000 | $1,920,000 | $1,920,000 | $1,920,000 | |||
| c | Prefered return of last year | $0 | $1,920,000 | $0 | $0 | |||
| d | Net cash flow (a-b-c) | -$3,200,000 | $2,360,000 | $5,180,000 | $5,980,000 | |||
| e | Share of investor in net cashflow(d*80%) | -$2,560,000 | $1,888,000 | $4,144,000 | $4,784,000 | |||
| f | Share of retailer (d*20%) | -$640,000 | $472,000 | $1,036,000 | $1,196,000 | |||
| g | Total share of investor (e+b+c) | -$2,560,000 | $5,728,000 | $6,064,000 | $6,704,000 | |||
| h | CF from sale | $48,000,000 | ||||||
| i | Capital on investor | -24,000,000 | $24,000,000 | |||||
| j | Retailer's capital | -6,000,000 | $6,000,000 | |||||
| k | Remaining | $18,000,000 | ||||||
| l | Share of retailer @ 50% | $9,000,000 | ||||||
| m | Share of investor @ 50% | $9,000,000 | ||||||
| n | Total cashflow for investor (g+i+l) | -24,000,000 | -$2,560,000 | $5,728,000 | $6,064,000 | $39,704,000 | ||
| o | Total cashflow for retailer(g+j+m) | -6,000,000 | -$640,000 | $472,000 | $1,036,000 | $16,196,000 | ||
| p | IRR (investor) | 20.66% | ||||||
| q | IRR (retailer) | 29.62% | ||||||
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