Question

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

Answer 1

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%