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Angus Cartwright, Jr
Case Analysis
J Srinivasan
2008PGP091B
Introduction:
Mr. Angus Cartwright, a financial planner, needs to make
recommendations for his two long-time family clients, the
DeRights. John and Judy DeRight are coming to Cartwright at
different stages in their life and both are interested in
diversifying their investment portfolio to include investments in
real estate. Cartwright has four properties he believes to be
perfect for his clients however he needs to narrow them down
to just one property to each client.
John DeRight, currently in retirement, will have $9 million from
the sale of stock to invest in a property. He is comfortable with
his retirement savings, but would like to diversify his retirement
funds in real estate. He requires a 12% return. Judy DeRight
has $16 million available to invest. She is at the peak of her
career and is likely interested in longer-term possibilities
compared to John. She also requires a 12% return on her
investment.
Investor’s Profile:
John DeRight is a retiree and has all of his wealth in securities;
primarily in common stock of a company that bought his
startup company. John currently has $6 million in stocks.
Dividends from these stocks provide John his main source of
income. Not diversifying but having all his net-worth in one
basket can be very risky and especially in common stocks. John
wants to diversify his portfolio by taking approximately $3
million out of securities to invest in real estate. Again, John is a
retiree looking to balance his portfolio by including real estate
investments. His investing profile can be stated as low risk
investor looking for periodic income payments (steady income
stream) in which John can use for daily living expenses.
Judy DeRight is a much younger investor. She owns and
operates her own company as President. The company
performs well with annual income of $800,000 before taxes and
$500,000 after taxes. Judy was able to accumulated $3.5
million and also wants to diversify her investments to include
real estate. Judy presumably is in a high-income bracket and
does not necessarily need immediate cash-flows from her
investments. Her investing profile can be characterized as
higher-risk, higher return, no immediate income from
investment is necessary, high potential gains in later years
(targeting appreciation), and currently would like investments
with tax shelter capabilities due to current high ordinary
income from other sources.
Analysis:
Properties: NPV:
Before $ $ $ $
Tax Cash 127.00 1,004.73 871.41 540.80
Flow
Discounted
Return Measures
Internal Rate of 16.51% 16.36% 16.01% 16.01%
Return
Net Present Value $ $ $ $
@ 12% 454500 3,15,429 3,27,69 4,35,029
0
Profitability Index 29.90% 37.11% 25.21% 31.07%
(NPV)
Interpretation:
From the NPV calculation we can see that Alison Green and
Fowler Building are the best investment. But this calculation
does not take into account the risk factor. IRR method was not
used for calculation because there is a large re-investment risk.
Now taking both NPV and the risk factor into account Alison
Green and Fowler Building are the best investments.
Recommendation:
As a retiree, John’s future income is limited to whatever returns
he’ll receive from his investments. He requires an investment
that can shelter some of his income and producereliable future
resources.
Hence he should invest in Alison Green for his needs.
Judy has more income earning potential, more years before
retirement, and even more equity to invest in properties. This
opens her up to potentially riskier investments, and possibly
longer-term properties. With Judy’s ability to invest in higher-
risk properties, she would get higher returns and shelter more
income by investing in Stony Walk. Stony Walk has the
greatest shelter, shows very solid returns both in the operating
cash flow analysis and in the final sales price.