Question: The Webber Company is an international conglomerate with a real
The Webber Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $25 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $23.5 million today. If demand increases, the building would be worth $26.8 million a year from today. If demand decreases, the same office building would be worth only $22 million in a year. The company can borrow and lend at the risk-free annual effective rate of 4.8 percent. A local competitor in the real estate business has recently offered $750,000 for the right to build an office building on the land. Should the company accept this offer? Use a two-state model to value the real option.
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