Joint Venture Analysis

Joint venture is another method to provide capital if a company doesn’t have enough equity to fund a project. Joint venture has some considerations to compare to debt and loan:

• In most cases, if a project fails, any bank loans and debt have to be repaid (depending on the loan agreement). But in a joint venture, the money doesn’t need to be repaid.
• Equity dilutes the ownership. In a joint venture, the profit will be shared between partners (based on their partnership), but the original investor can keep the entire profit, if she or he takes a loan instead of forming a joint venture.
• Debt and borrowed money may impose financial and non-financial restrictions on the investor (depending on the loan agreement).
• Depending on the performance of the project, the cost of equity may change over time, but cost of debt and loan are usually fixed.
• The interest portion of repaid money for the borrowed money and debt are deductible from tax, but the sum of money paid to the shareholders (dividend) is not.

Example 10-3

Following Example 10-1, assume a 50-50 joint venture that shares all the costs and benefits equally. Calculate the ROR and NPV at minimum rate of return 10%.

So for this, After Tax Cash Flow $\text{ROR}=11.33\%\text{ and }NPV10\%\text{ will be }\$15,246.$

Please note that in this case (50-50 joint venture investment), ROR for each partner will be similar to the case that one investor provides the entire equity. However, NPV for each partner is half (partnership ratio); compared to one investor providing the entire equity case.