2. (40 points) A Building on Northern Shores When preparing capital budgeting analysis for a new commercial real estate development, Marcus Butterman, a chief financial officer at WFB Industries, faced a dilemma. He knew his firm had flexibility as to when to undertake the development. It could be done immediately, in 2021. If so, the construction costs would be pretty high due to high demand for construction equipment from other firms. In total, he estimated the complex would cost $2M to build. However, due to significant demand for office space in Northern Milwaukee suburbs, there would be a 80% chance that the building would be rented out starting next year. If so, he expected new cash flow of SOOK per year over the next 10 years. There is a 20% chance that the building would not be rented out, however, and the firm would need to maintain it at a cost of $50K per year. If the building is not rented out in 2022, there is a 50% chance it would be rented out in 2023, and if not, a 20% chance it would be rented out in 2024. If not rented out in 2024, they would have to sell the building for $500K to another firm that would repurpose it for an alternative use. If the firm does rent it out in any year, after 10 years of renting, the firm expected to sell the building for $500K. If he waited one year, until 2022, building costs would drop dramatically, to $1.5M. However, so would the likelihood of renting out the building the year after, 2023, to 60%, and the net cash flow, to $450K per year. However, the cash flow would still occur over 10 years. The likelihood that the building would stay vacant would be 40%. Similarly, in that case, the maintenance costs will amount to $50K per year. If not rented in 2023, it faces the probability of 40% of renting it out in 2024. If not rented out in 2024, the probability of renting it out in 2025 drops to 20%. If not rented out in 2025, they would have to sell the building for $500K to another firm that would repurpose it for an alternative use. If the firm does rent it out in any year, after 10 years of renting, the firm expected to sell the building for $500K. Since he has not dealt with uncertainty regarding renting out developments before, Mr. Butterman is bewildered and asks your help in determining the course of action regarding this opportunity. Mr. Butterman has estimated that the WACC for the company in certain times has been 10%. Assume that the project has no tax implications, i.e. the tax rate of 0%. a) What is the NPV of building in 2021? b) What is the NPV (in year 2021) of delaying the investment until 2022? c) should the firm invest in the project in 2021, 2022, or not invest at all? d) What maximum discount (in % relative to the original amount) would Mr. Butterman be willing to provide to the tenants to sign the contract for renting the apartments starting 2022, before he commits to the development of the project in 2021? Mr. Butterman would like to maintain the original NPV of the project in the process, though. Explain your