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Cadim China and India Real Estate Deals Case Solution

Solution Id Length Case Author Case Publisher
585 842 Words (3 Pages) Stephen R. Foerster, Marc Folch Ivey Publishing : 909N04
This solution includes: A Word File A Word File and An Excel File An Excel File

The three deals offered to Cadim involve reputable companies with a proven track record of significant achievements in the industry. Therefore, it is very hard to differentiate between the three offers based on the assessment of the partners. Cadim has previously worked with Atlantis and has had a particularly good experience. However, the main difference lies between the management styles. Foereau does not follow a North American style management practices. Apart from these minor differences, all three companies are similar. They have significant market shares and are reliable. Also, all three companies have sufficient local experience and connections. They are linked to the decision making authorities in the country. The projects offered align the financial interest of the two partners. Lastly, all three partners have the capacity to provide a steady stream of projects in their respective zones.

Following questions are answered in this case study solution:

  1. Assessing the Partner

  2. The Risk Landscape

  3. Portfolio Assessment

  4. Financial projections

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Cadim China and India Real Estate Deals Case Analysis

The Risk Landscape

Two of the three projects are based in India. The main problem with India is the political instability factor. The central government is formed by coalition parties, and therefore policy making is a tough process. Also, policies can be changed to cater to the interest of any of the political allies. Also, India and China both have benefitted from the devaluation of their currency; this has made their exports cheaper and helped them to earn great revenues. However, for Cadim, this involves the risk of devaluation of the investment amount. Also, it will also decrease the dollar value of return on investment for the company. On the other hand, the business plans are strong, and there is a strong need for such projects in the market.

Portfolio Assessment

Diversification holds the key to minimizing risks to investments. Cadim has successfully managed to diversify its portfolio and minimize the investment risks. However, the company has not invested in the Asian markets or more specifically the developing countries. Although, there are numerous risks associated with investments in developing countries, there are also higher returns that are the main cause of attraction for the investors. Investors can not only recover their investment amount, but they also manage to make a healthy profit on it. This is why developing countries are considered the best place for investments. China and India have managed to maintain a high GDP growth rate despite economic turmoil in the world primarily because of the investment inflow from all over the world. Both countries compete aggressively for FDI. Another attractive feature is the tax structure and other benefits to the investors. This helps to attract more investors for manufacturing and residential projects.

Financial projections

The cash flows from the three projects have been computed for three possible scenarios. For the sake of sensitivity analysis, the best and the worst case have also been presented. The cash flows for Atlantis have been computed for six years while the other two projects have an average life of 4 years. Using a discount rate of 16% (which has been computed using the rate of return of 14% on Cadim’s portfolio and adding 2% to it), the cash flows for the three projects have been discounted. The resulting values have been arranged in a table in the excel sheet.

The criteria for making a decision based on financial data involve two aspects:

1. IRR

IRR is seen as the rate of development a venture is looked for to create. The real rate of dividend that a given task comes around to creating will frequently vary from it is assessed IRR rate, a undertaking with a significantly higher IRR esteem than different ready choices could at present furnish a much preferable risk of robust development.

In addition, IRRs can be examined in opposition to common rates of benefit in the securities business. Depending on if a solid cannot discover any ventures with IRRs more fabulous than the dividends that could be created in the budgetary businesses, it might basically pick to put it is held income into the business.

2. NPV

NPV is simply the difference between the present value of cash inflows and outflows.

Criteria:

  • If the IRR is less than the cost of capital, then the project is rejected as it is not profitable for the company.

  • If the NPV is negative, then the project is rejected as the company is expected to bear a loss on investment.

i. Atlantis

 

IRR

NPV

Cadim's NPV

Expected Cash Flows

18%

5315814637

1860535123

Optimistic Cash Flows

26%

7057101792

2752269699

Pessimistic Cash Flows

0%

-138868176.5

-41660452.95

ii. Foereau

 

IRR

NPV

Cadim's NPV

Expected Cash Flows

39%

2829493365

1414746683

Optimistic Cash Flows

46%

3357264824

1678632412

Pessimistic Cash Flows

27%

2128124481

808687302.8

ii. Stronghold

 

IRR

NPV

Cadim's NPV

Expected Cash Flows

13%

64367653.45

25747061.38

Optimistic Cash Flows

29%

131502734.8

65751367.42

Pessimistic Cash Flows

11%

145979567.5

58391827.01

Based on the results in the tables above it can be seen that Foerea offers the most profitable project to Cadim. This along with the other assessment measures gives Foereau a far greater edge than the other two projects. Therefore, Cadim should sign an agreement with Foereau.

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