Cash Flows ICI and PDI Office Building Joint Venture Assignment

Assignment Task

Investor Capital Inc. (ICI) has decided to enter into a joint venture with Property Developers Inc. (PDI) to develop and operate an office building. The project will require an initial equity investment of $50 million, with ICI investing $45 million and PDI investing the remaining $5 million.

We assume that each party invests its capital and then participates in year-end cash flows as projected below. It is further assumed that the property will be sold at the end of the fifth year for net proceeds of $75 million.

During the operating period, the joint venture agreement specifies that ICI will receive a 5 percent noncumulative, preferred return on its $45 million of equity. Only after ICI receives its preferred return, will PDI receive a 5 percent noncumulative return on its $5 million of equity. Any remaining cash flow is then split 50/50. All preferred returns are calculated by multiplying the respective percentage by the partner’s initial investment

When the property is sold, cash flow is distributed as follows:

1. An amount to ICI equal to its initial equity investment
2. An amount to PDI equal to its initial equity investment
3. An amount to ICI sufficient to earn a 12% IRR on its equity investment
4. Any remaining cash flow is distributed 50/50

Cash Flows

1. Prepare a summary of cash flows to each investor
2. Determine the amount, if any, of cash flow distributed to ICI to satisfy item iii. above.
3. Prepare a schedule and determine the total IRR to each investor.

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