A property developer is considering taking advantage of the current increase in people working from home. It believes that it is possible to create a block of 500 new personal distance offices with high-speed interconnections and smart rooms that will be attractive to employers once the pandemic threat recedes. The current estimate of the rental revenue per office unit per year is 41,250. The cost of servicing each office unit is 20,000 per year. The riskless rate of return which is used by the project planners to discount all monetary flows - is 5%. If the project is undertaken this year, it will cost 67.5 million and generate revenue starting now. Once built, the offices are expected to generate the same annual costs and revenues forever.

(a) What is the NPV if the project is undertaken now?

(b) Now suppose that next year, when the current uncertainty is resolved, the rental revenue per unit per year is expected either to rise to 90,000 (the recovery state, with a probability 25%) or to fall to 25,000 (the long Covid state, probability 75%) and to remain at that level forever. If the decision about whether to build the offices is delayed till next year, the project cost will change - to 75 million in the recovery state or 52 million in the long Covid state, but the annual servicing cost will remain at 20,000 per unit per year. What is the NPV of the project being delayed?

(c) When (if at all) should the project be undertaken and what is the option to delay the project worth to the developer?

(d) A university student living in the town points out that the project is risky (at least in the first year). How would this be taken into account?