J&R constructions company owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $37.8 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $36 million today. If demand increases, the building would be worth $39.4 million a year from today. If demand decreases, the same office building would be worth only $35 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 offered J&R Construction Company $X for the right to build an office building on the land. Use the binomial model to find the value of X that would leave J&R Construction Company indifferent to accepting or rejecting the offer. Assume risk-neutrality
J&R constructions company owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $37.8 million to construct.
Due to low demand for office space in the downtown area, such a building is worth approximately $36 million today. If demand increases, the building would be worth $39.4 million a year from today. If demand decreases, the same office building would be worth only $35 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 offered J&R Construction Company $X for the right to build an office building on the land. Use the binomial model to find the value of X that would leave J&R Construction Company indifferent to accepting or rejecting the offer. Assume risk-neutrality
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