Question

# Investor has entered in a joint venture with a property developer to develop and operate a...

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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