Contemporary Engineering Economics (6th Edition)
Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
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Chapter 13, Problem 17P
To determine

Calculate the license value.

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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 $15 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $13.5 million today. If demand increases, the building would be worth $16.8 million a year from today. If demand decreases, the same office building would be worth only $12 million in a year. The company can borrow and lend at the risk-free annual effective rate of 6 percent. A local competitor in the real estate business has recently offered $728,000 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.,…
In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $80 per room per night to service. You spent $25.00 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $20 million. If the estimated demand is 10,000 room-nights, the break-even price is:__?____per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)
The buyer of a piece of real estate is often given the option of buying down the loan. This option gives the buyer a choice of loan terms in which various combinations of interest rates and discount points are offered. The choice of how many points and what rate is optimal is often a matter of how long the buyer intends to keep the property. Darrell Frye is planning to buy an office building at a cost of $988,000. He must pay 10% down and has a choice of financing terms. He can select from a 7% 30-year loan and pay 4 discount points, a 7.25% 30-year loan and pay 3 discount points, or a 7.5% 30-year loan and pay 2 discount points. Darrell expects to hold the building for four years and then sell it. Except for the three rate and discount point combinations, all other costs of purchasing and selling are fixed and identical. 1. If Darrell chooses the 2-point 7.5% loan, what will be his total outlay in points and payment after 48months? (Wells Fargo)
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