The J&J Construction Company is evaluating an investment project to build a golf resort complex on a particular land site. J&J can obtain a one-year option to buy the required parcel of land, and if the land is purchased, the price would be $3,000,000. The land option (if purchased) would expire one year from now. J&J has two years from today to make a decision on whether to build the golf resort complex and start operations. The cost of the building and initial operating capital is $12,000,000. They estimate that the land could be sold for 90% of its purchase price if they decided not to build the resort complex. Given the following criteria:
• The value of the complex if it existed today would be worth V = $19,500,000.
• Volatility of the project return is 25%.
• Risk-free interest rate is 5% continuous per year.
What would the company be willing to pay for the combined value of the land option and related prefeasibility studies (i.e., environmental impact assessment, etc.) before actual construction of the golf resort complex?