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 $61 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $59 million today. If demand increases, the building would be worth $63.4 million a year from today. If demand decreases, the same office building would be worth only $57 million in a year. The company can borrow and lend at the risk-free annual effective rate of 2 percent. A local competitor in the real estate business has recently offered $760,000 for the right to build an office building on the land. What is the value of the office building today? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Building value
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 $61 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $59 million today. If demand increases, the building would be worth $63.4 million a year from today. If demand decreases, the same office building would be worth only $57 million in a year. The company can borrow and lend at the risk-free annual effective rate of 2 percent. A local competitor in the real estate business has recently offered $760,000 for the right to build an office building on the land. What is the value of the office building today? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Building value
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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Transcribed Image Text: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 $61 million to construct. Due to
low demand for office space in the downtown area, such a building is worth
approximately $59 million today. If demand increases, the building would be worth $63.4
million a year from today. If demand decreases, the same office building would be worth
only $57 million in a year. The company can borrow and lend at the risk-free annual
effective rate of 2 percent. A local competitor in the real estate business has recently
offered $760,000 for the right to build an office building on the land. What is the value of
the office building today? Use the two-state model to value the real option. (Do not
round intermediate calculations and enter your answer in dollars, not millions of
dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Building value
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