I need help with this problem and putting into an excel format with formulas. You are looking into the purchase of a condominium complex for your privately-held real estate firm REInvest Corp. The condominium complex would cost $38 million today.  This condominium complex would be a typical investment for CondoPlus Inc. You think that the outcomes of this investment will depend on how the economy does in the near future.  You think that there is a 40% chance that the economy will keep improving.  This will result in CFs of $5 million next year, with the CFs increasing by 5% per year into perpetuity.  There is a 30% chance of the economy growing very slowly, which will result in CFs of $3 million next year with 2% growth per year in perpetuity. And there is a 30% chance that the economy will shrink, causing CFs to be $1 million next year with only 1% growth per year into perpetuity. You could purchase an option to sell the condominium complex exactly 1 year from now for $25 million.  How much is this option worth?  The discount rate is 12%.

Question

I need help with this problem and putting into an excel format with formulas.

  1. You are looking into the purchase of a condominium complex for your privately-held real estate firm REInvest Corp. The condominium complex would cost $38 million today.  This condominium complex would be a typical investment for CondoPlus Inc.

You think that the outcomes of this investment will depend on how the economy does in the near future.  You think that there is a 40% chance that the economy will keep improving.  This will result in CFs of $5 million next year, with the CFs increasing by 5% per year into perpetuity.  There is a 30% chance of the economy growing very slowly, which will result in CFs of $3 million next year with 2% growth per year in perpetuity. And there is a 30% chance that the economy will shrink, causing CFs to be $1 million next year with only 1% growth per year into perpetuity.

You could purchase an option to sell the condominium complex exactly 1 year from now for $25 million.  How much is this option worth?  The discount rate is 12%.

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