CASE STUDY

A real estate company comes out with a plan to hedge against economic downturn by ensuring
regular availability of working capital. To do this they come out with a land product that is low
priced and offered in installment scheme. The plan is to come out with 5000 units of this product
and sell it to 5000 customers.

There are two such products

Both products are plots with motorable road and demarcation. These developments will be done
by the company.

Product 1: 4000 units

1 acre agricultural plot
Down payment will be Rs 65000 and installments will be Rs 5000 for 60 months.

Product 2: 1000 units

½ acre NA plot
Down payment will be Rs 50,000 and installments will be Rs 3000 for 60 months.

The company will buy the land for Rs 1 lakh per acre. The development cost is Rs 75000
per acre. In order to fund these land purchases the company gets equity from investors @
Rs 10 lakh per investor to which the return will be Rs 18 lakh over 5 years with a return
plan as follows: Rs 10 lakhs principle returned after 2 years, Rs 6 lakhs each in the third
4th and 5th years.

The above project needs to be sold off over a period of 3 years.

Exercise
1. A projected monthly cash flow needs to be created and the following need to be
ascertained
a. How many investors are required?
b. What will be the working capital available month on month over the 5
year period?
c. What will be the land acquisition schedule?

2. What is the total profitability?

Guidelines
1. Sales will not be uniform but will follow an increasing pattern. However all units
to be sold in 3 years.
2. It is possible any point of time to sell 50% more than what has been acquired.
3. All development will be done in the third year.