CITIC TOWER II Case Solution
Net Present Value
The standard method for using the time value of money to appraise the long-term projects is used to evaluate the current decision with Larry Yung Chi. In the given case the value for the discounted cash flows is considered to be HK $ 1.534 billion that is compared with the initial out flow of the cash in the beginning of the project of around HK $ 1.6 billion which is the cost associated with the land and the building. The resulting NPV gives the disappointing result for Mr. Larry as it is coming negative of around HK $ (65,524,235.92) .
Internal Rate of Return
The rate gives the overall return on investing in the given project. By taking all the cash flows which include the initial outflow and the future forecasted cash flows, the projected IRR can be taken which is 15%.
The ratio of the present value of the future forecasted cash flows over the initial outflow of cash gives the value of payoff to investment of a proposed project. The given case gives the negative profitability index of about 0.96, which gives leads to the recommendation of not to proceed with the project.
Through the qualitative as well as quantitative analysis, by using the discounted cash flow method as prescribed in the case instruction , Larry was disappointed after identifying that investing in Citic tower II did not seem to bring clear positive returns. Under the rigid assumptions set by property development team and the deal, itreflected a present value of around HK $1.54 billion anda cost of around HK $1.6 Billion. Larry intuitively felt that the decision did not allow for anyflexibility, managerial discretion or strategic actions.As a result, it is recommended not to go for the project.
NPV: Net present value (NPV) is defined as the total present value(PV) of a time seriesof cash flows
. It is as tandard method for using the time value of money to appraise long-term projects.
If the project was truly a success, then waiting would mean a loss or deferral of its early cash flows,however the project did not appear to be clearly attractive.
The company is dealing in the real estate market which is considered highly volatile.If the Black- Scholes model is used instead, which also undertakes the volatility aspect, then the true recommendation could be achieved by going ahead with the project……………..
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