GREEN

MEADOWS
PROJECT
CATUBIG, KRIZIA PAULA D.
LASPINAS, JOHN PATRICK C.
REPONTE, HOLDEN C.
YUZON, HANNE JOY D.

I.

SUMMARY
Mr. Lund, a recently graduated MBA, was assigned to work on some of the financial
aspects of the preliminary contract negotiations as his first task on joining the staff of the
development agency. These negotiations concerned Green Meadows, a proposed
community for which the Lightning Aircraft Corporation (LAC) might become the prime
private developer in partnership with the Central Region Development Agency (CRDA).
The CRDA had considerable experience in various aspects of regional economic
development and was considered by many as a model for such a government agency. The
agencys development activities had grown and now encompassed a wide front. CRDA
was funded by annual government appropriations passed by Congress and by individual
state legislatures. Although a government agency, CRDA had considerable freedom and
autonomy from sister governmental organizations and from its sponsors in pursuing its
activities.
The idea of Green Meadows itself had arisen some ten years earlier, when plans for
damming the Kokomo River were first formulated. The site of the dam and subsequent
lake on the Kokomo seemed to Mr. Jim Colbeck, then a regional planner, to be a logical
spot for a new town.
As the idea became accepted and somewhat modified at the higher levels of CRDA
management, the Green Meadows project seemed to offer the chance to reach previously
identified economic and social objectives relating to better job opportunities and to a
wider range of housing for area residents. In this sense, CRDA could make a contribution
to the national interest.
In 1971, LAC contacted CRDA and asked if the latter might be interested in exploring the
possibility of LACs participation in developing the new town. The desire to diversify
and to use its skills in corporate systems management led LAC to consider working with
CRDA in new town development.
After a preliminary examination of CRDAs ideas, which lasted several months, LAC
decided to try to continue developing the Green Meadows concept.
During the last half of 1972 and in early 1973, the two parties worked together to gather
basic economic, financial, and physical data on which to base preliminary plans for the
possible new town. Not only did the basic physical conceptualization of the town and its
waterfront have to be carried out, but exploratory work had to be coordinated with
various state agencies and local governments and some federal agencies.

II.

STATEMENT OF THE PROBLEM

What maximum rate of return1 should Mr. Roger Lund recommend?

This rate pertains to the return that Lightning Aircraft Corporation (LAC) might earn in
the funds it committed to the Green Meadows Project. It is very important to determine
this figure because it is a prerequisite to the formalization of a planning and development
contract between LAC and CRDA (Central Region Development Agency).
III.

POINT OF VIEW
Mr. Roger Lund, MBA

IV.

ALTERNATIVE COURSES OF ACTION

a) Rate based on past achieved rates of return.
ADVANTAGES
Estimation of the current rate of return is reliable since the trend of
previous rates of return is determinable.
We are able to take into account the things that we might have overlooked
in the past investment projects.
DISADVANTAGES
LAC did not have much information readily available.
Since LAC would naturally prefer relatively high limit to be set, Mr. Lund
felt that any information he did obtain on past achieved rates of return
might be slanted in favor of projects that had proved successful.
b) Cost of Capital.
ADVANTAGES
It will serve as a reasonable benchmark in evaluating proposed
investments.
Applying the historical data in a mathematical equation will result to a
more realistic estimation.
DISADVANTAGES
Mr. Lund is unsure as to how taxes should be taken into account and the
different methods of computing the tax rates give substantially different
figures.
Integrating relevant industry data in the calculations will result to another
figure which can lead to confusion.

c) Capital Asset Pricing Model

ADVANTAGES
Mulling over the other pertinent data from various sources, the CAPM is
appropriate in determining the rate of return.
The element of risk is highlighted.
DISADVANTAGES
There is a need to test the reliability of the components of the equation
used in the CAPM in order to yield a reliable estimation.
This is a one-period model developed using assumptions of perfect capital
markets which in reality are not absolutely perfect.
V.

RECOMMENDATION
Weighing the alternatives aforementioned, we have come up with an alternative of using
the Capital Asset Pricing Model (CAPM) as a method of determining the rate of return.

VI.

PLAN OF ACTION
The recommendation above is then proposed to be implemented in accordance
with the following steps:
a. Determine the Rate of Return to be recommended in the next board meeting
using the Capital Asset Pricing Model.
b. Defend to the board why the CAPM is the best method in the determination of
the maximum rate of return.
The best method is the CAPM for the reason that although this also has
some disadvantages, the holdbacks of the other alternatives are of greater gravity
than that of the CAPM. To note, the first alternative requires data that is not
readily available. On the other hand, the second alternative as a computation
constitute difficulty in solving due to the various data that is made available. Mr.
Lund was unsure on how to account these figures. Finally, the CAPM offers a
simpler yet more realistic statistical tool in assessing the profitability of
investment proposals.
c. Proceed to the next steps necessary to formalize the contract between the two
parties (LAC and CRDA).
d. Provided with the formula of :
Expected rate of Return = RF + i (MR-RF)
Where;
RF = riskless rate of return
i = index of volatility for the security, that is, the ratio of its
change in value for a given change in the value of the market index

MR = expected rate of return for the market index, commonly the

425 industrial stocks used as an index by Standard and Poors.
Let;
7.2 be the current long-term government debt be the riskless rate of
return;
1.58 be the i , since that is the average of four real estate
companies;
9.0 be the market rate.
COMPUTATION:
Expected rate of Return = RF + i (MR-RF)
= 7.2 + 1.58 (9.0 - 7.2)
= 7.2 + 2.844
= 10.044
Thus, 10.044 will be used as a rate of return to determine the return on
investment.