Reference no: EM133068096

Two investors are going to co-invest in a three-year project whose cost in year 0 is $100M. Investor 1 is a passive investor that finances 90% of the cost of the project. Investor 2 (the operator) finances 10% of the initial cost and will run the project. In the benchmark scenario, the project will generate $50M in year 1, $50M in year 2, and $30M in year 3. The contract between the two investors features an incentive clause for the operator. Specifically, cash-flows will be distributed according to the initial stake (90% to the passive investor, 10% to the operator) until the passive investor gets an IRR of 10%. Once enough cash flows have been generated to deliver this return, excess cash flows will be split 50-50 (50% to the passive investor, 50% to the operator.) If the benchmark scenario materializes, what IRR is the operator going to get from this project?