A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time, the building will cost $1,000,000 to construct. During the first year after construction would take place, there is a 60 percent chance that NOI will be $150,000 and a 40 percent chance that the NOI will be $75,000. In either case, NOI would be expected to increase at 2 percent per year after the first year. Required: What is the value of the land at the end of the year in both possible scenarios? How much should the developer be willing to pay for the land?

A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time, the building will cost $1,000,000 to construct. During the first year after construction would take place, there is a 60 percent chance that NOI will be $150,000 and a 40 percent chance that the NOI will be $75,000. In either case, NOI would be expected to increase at 2 percent per year after the first year. Required: What is the value of the land at the end of the year in both possible scenarios? How much should the developer be willing to pay for the land?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EA: Gardner Denver Company is considering the purchase of a new piece of factory equipment that will...

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Consider an investment in which a developer plans to begin construction, of a building that will cost $2,000,000, in two years if, at that point, rent levels make construction feasible. There is a 40 percent chance that NOI will be $200,000 and a 60 percent chance that NOI will be $80,000 one year after the construction. Assuming 10 percent discount rate and an NOI growth rate of 5 percent, what would the land value be at the completion of the construction, under the real options approach?
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