Question: Consider an investment in which a developer plans to begin construction, of a building that will cost $1,500,000, in one year if, at that point,

Consider an investment in which a developer plans to begin construction, of a building that will cost $1,500,000, in one year if, at that point, rent levels make construction feasible. There is a 50 percent chance that NOI will be $360,000 and a 50 percent chance that NOI will be $120,000. Assume a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent).

a. Referring to Scenario 2 above, how much should the developer be willing to pay for the land today?

b. Referring to Scenario 2 above, what is the value of the real option on the vacant land?

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