A net present value calculation can then be done, using the company's 6.15% ROE as the unleveraged discount rate. The NPV calculation reveals that the project's net present value over the course of the first nine years is RMB 4.081 billion. Using a sensitivity analysis wherein the initial assumptions with RMB 315 per square foot per year in the first year and the high-end assumptions about returns in subsequent lease cycles (15% and 27%), the value of the property is just over RMB 6.7 billion.

There is good reason to be optimistic -- Hang Lung would not be at the table if there...

At 100% occupancy immediately, the value would only be RMB 7.1 billion. This makes it difficult to justify going any higher on the bid.
The project will run longer than nine years in this location, and the company can incorporate addition years into the NPV calculation. However, the price tag is steep now, considering it is just for the land. The projected revenues simply do not justify this price for this land. Hang Lung should back out of the bidding at this…