Group1_Citic Tower.docx - CITIC TOWER II THE REAL OPTION...

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1 CITIC TOWER II: THE REAL OPTION Case facts Citic Pacific Limited is a real estate company in Hong Kong. They started business from infrastructure and related assets activities, CPL then had stakes in different trading and property companies. In 1995, CPL began the development of Citic Tower. Despite the financial crisis in Hong Kong in 1999, Citic Tower turned out to be profitable. Larry Yung, Chairman of CPL, had the opportunity to acquire a piece of land near Victoria Harbour, and develop it into an office building– namely Citic Tower II. Though, the Net Present Value rule showed the project had a negative NPV. In Larry’s opinion, this could change as the commercial realty market was so volatile that the market may be on the upturn later. Our question was, can CPL just buy the option to purchase the land, and decide whether to launch the project a year later? Analysis When you buy a call option, then you have the right to purchase an underlying asset at a price predetermined on a certain date. The right to continue with a business investment

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