J&R Construction Company is an international conglomerate with a real estate division that owns the right to
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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 $ million to construct. Due to
low demand for office space in the downtown area, such a building is worth
approximately $ million today. If demand increases, the building would be worth
$ million a year from today. If demand decreases, the same office building would be
worth only $ million in a year. The company can borrow and lend at the riskfree
annual effective rate of percent. A local competitor in the real estate business has
recently offered $ for the right to build an office building on the land. What is the
value of the office building today? Use the twostate model to value the real option. Do
not round intermediate calculations and enter your answer in dollars, not millions of
dollars, rounded to decimal places, eg
Answer is complete but not entirely correct.
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