Question

2. ABC Fund has decided to enter a joint venture with Newton Development Inc. to develop and operate an office building that will require an initial investment of $200 million to cover all the development costs. There will be no debt financing for the joint venture. Each partner invests its capital at the beginning of the first year and cash flow from operations is projected as follows:

Year 1 $3,000,000

Year 2 $8,500,000

Year 3 $19,000,000

Year 4 $27,000,000

Year 5 $42,500,000

Year 6 $57,000,000

It is expected that the property will sell for $300 million at the end of year 6. ABC Fund will invest $180 million and Newton Development will invest the remaining $20 million. The development costs already include a developer fee to Newton and the cash flow projections for each year above are net of a property management fee being paid to Newton Development Inc. ABC Fund will receive a 5% preferred return that is noncumulative. After ABC is paid its preferred return, Newton Development Inc. will receive a 5% operating return that is noncumulative on its contributed capital. Remaining cash flows from operation, if any, will be split 50-50 to each party. When the property is sold, proceeds from the sale will be distributed as follows:

1. First, repay the initial capital investment by ABC Fund

2. Next, repay the initial capital investment by Newton Development Inc.

3. Next, pay ABC fund a 14 percent IRR preference on its investment

4. Thereafter, split all proceeds 50-50 Use the above assumptions to calculate the (i) cash flows that each party will receive and (ii) the expected IRR for each party.

Answer 1

Given

ABC Fund and Newton Development Inc are Joint Ventures.

Initial Investment = 200 Million Dollars

ABC Fund Invests 180 Million Dollars

Newton Development Inc Invests 20 Million Dollars

ABC Recieves 5% Preferred Return and After ABC Recieves its preferred return, New Devlopment Inc will receive 5% operating return on contributed capital. Remaining amount will be split 50-50 each party.

YEAR	CASH FLOWS(In Dollars)	ABC Fund Preferred Return@5% (In Dollars)	Newton Development Inc Preferred Return @5% (In Dollars)	Remaining 50% to ABC Fund (In Dollars)	Remaining 50% to Newton Development Inc (In Dollars)	TOTAL AMOUNT PAID IN YEAR TO ABC FUND (In Dollars)	TOTAL AMOUNT PAID IN YEAR TO NEWTON DEVLOPMENT INC (In Dollars)
1	3000000	9000000	0	0	0	3000000	0
2	8500000	9000000	0	0	0	8500000	0
3	19,000,000	9000000	1000000	4500000	4500000	13500000	5500000
4	27,000,000	9000000	1000000	8500000	8500000	17500000	9500000
5	42,500,000	9000000	1000000	16250000	16250000	25250000	17250000
6	57,000,000	9000000	1000000	23500000	23500000	32500000	24500000

In first year cash flows are less than the preferred return to ABC Fund

The preferred return to ABC Fund is calculated as = Initial Investment * Preferred Return = 180000000*5% = 9000000

So, in first year, the cashflow will be only distributed to ABC Fund that is 3000000 and in subsequent years whenever Cash Flows are more than ABC Fund, they are first given as preferred return on Investment to Newton Development Inc that is 20000000*5% = 1000000 and the remaining amountb will be distributed amongst them equally.

Since it is given non cumilative in nature, the amount that is unpaid will not be paid in subsequent years.

DIVISION OF SALE PROCEED
PARTICULARS	TOTAL AMOUNT(In dollars)	AMOUNT TO ABC FUND(In dollars)	AMOUNT TO NEWTON INC(In dollars)
Sale Proceeds	300000000
ABC Initial Investment	-180000000	180000000
Newton Intitial Investment	-20000000		20000000
Balance	100000000
IRR of 14% on ABC Investment	-25200000	25200000
Balance	74800000
Splitting 50-50 between two parties	-74800000	37400000	37400000
TOTAL	0	242600000	57400000

Sale Proceeds are distributed to the parties based on the instrutions given in the question.

The total Cash Inflows and Cash Outflows of two Ventures are given below

YEARS	ABC Fund Cash Flows(In dollars)	Newton Fund Cash Flows(In dollars)
Year 0	-180000000	-20000000
Year 1	3000000	0
Year 2	8500000	0
Year 3	13500000	5500000
Year 4	17500000	9500000
Year 5	25250000	17250000
Year 6	32500000	24500000
Year 6 (From Sale Proceeds)	242600000	57400000
IRR (Using Function in Excel)	11.02%	35.02%

Total Cash Inflows that ABC Fund Received = 342,850,000, Net Cash Flow = 342,850,000 - 180,000,000= 162,850,000 dollars

Total Cash Inflows that Newton Development Inc Received = 114,150,000 Net Cash Flow = 114,150,000 - 20,000,000= 94,150,000dollars.