Question

The Webber 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 $17 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $16 million today. If demand increases, the building would be worth $18.2 million a year from today. If demand decreases, the same office building would be worth only $15 million in a year. The company can borrow and lend at the risk-free annual effective rate of 7 percent. A local competitor in the real estate business has recently offered $624,000 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 provide your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

No more information is given, the probability can be calculated

Answer 1