J&R Construction Company is an international conglomerate with a real estate division that owns the right to
Question:
J&R Construction 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 $60 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $53.5 million today. If demand increases, the building would be worth $65.5 million a year from today. If demand decreases, the same office building would be worth only $50.2 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 $1.8 million 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.
Step by Step Answer:
Corporate Finance
ISBN: 9781260772388
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe