Two-state model to value real option

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Reference no: EM131918987

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 $55 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $53.2 million today. If demand increases, the building would be worth $57.9 million a year from today. If demand decreases, the same office building would be worth only $49.8 million in a year. The company can borrow and lend at the risk-free annual effective rate of 4.8 percent. A local competitor in the real estate busines has recently offered $1.8 million for the rigth to build an office building on land. Should the company accept this offer? Use a two-state model to value the real option.

Answer on a piece of paper showing all work and using correct formulas.

Reference no: EM131918987

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