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An investor owns a lot that is suitable for either 6 or 9 condominium units. The per unit construction...

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An investor owns a lot that is suitable for either 6 or 9 condominium units. The per unit construction costs of the building with 6 units are $75000 and 9 units are $80000. Construction costs are the same whether construction takes place this year or next. The current market price of each unit is $100000. The per year rental rate is $6000 per unit (net of expense), and the risk-free rate of interest is 10% per year. If the market conditions are favourable next year, each condominium will sell for $110000. If conditions are unfavourable, each will sell for only $85000. Assume that once the construction take place, you can sell the condominium units immediately and receive the value of the unit. (a) If you build the condominium units today, how many condominium units will you build? What is the value of the lot in this case? (b) If you build the condominium units next year, what is the value of the lot today? (c) Calculate the value of option to delay.

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To determine the optimal decision we need to compare the value of building the condominium units tod View the full answer


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Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

ISBN: 978-1337614689

9th edition

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

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Question Details
Chapter # 10- Forecasting Financial Statements
Section: INTEGRATIVE CASE
Problem: 2
Posted Date: September 12, 2023 01:08:52
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