You own a piece of raw land in an up-and-coming area in Gotham City. The costs t

Question

You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs $0.10 x q^2 to build. After you construct a building on the lot, it will last forever but you are committed to it: You cannot put another building on the low. Buildings currently rent at $100 per square foot per month. Rents in this area are expected to increase in five years. There is a 50% chance that they will rise to $200 per square foot and stay there forever, and a 50% chance that they will stay at $100 per square foot per month forever. The cost of capital is fixed at 12.0% per year.

a) Should you construct a building on the lot right away? If so, how large should the building be?

The monthly discount rate is _____% (Round to five decimal places)

For the case of $200 per square foot per month rent the building should be _______ sq. ft. (Round to nearest integer)

For the case of $100 per square foot per month rent the building should be ________sq. ft. (Round to nearest integer)

b) If you choose to delay the decision, how large a building will you construct in each possible state in five years?

If you wait then the NPV of building in $200 sq. ft. state is $_____ million (Round to two decimal places)

If you wait then the NPV of building in $100 sq. ft. state is $_____ million (Round to two decimal places)

The PV today is $_____ million. (Round to two decimal places.)

If we build today, the size of the building should be _______ sq. ft. (Round to nearest integer)

The NPV is $____million (Round to two decimal places)

So, we should build a building of (100/200) sq. ft. (today/in five years)

Explanation / Answer

a) Should you construct a building on the lot right away? If so, how large should the building be?

The monthly discount rate is 12%

Yes we should construct the house .

For the case of $200 per square foot per month rent the building should be 200 sq. ft..

For the case of $100 per square foot per month rent the building should be 200 sq. ft.

b) If you choose to delay the decision, how large a building will you construct in each possible state in five years?

If you wait then the NPV of building in $200 sq. ft. state is $_____ million

answere

pobabilty of rate per sq feet = 100* .5 + 200* .5 = 150/-

150 * 200 = 30000

less cost per sq feet = .1 * 2002 = 4000 ( $0.10 x q^2 )

npv = 30000- 4000 = 26000$

If you wait then the NPV of building in $100 sq. ft. state is $_____ million

answere

pobabilty of rate per sq feet = 100* .5 + 200* .5 = 150/-

150 * 100 = 15000

less cost per sq feet = .1 * 1002 = 1000 ( $0.10 x q^2 )

npv = 30000- 4000 = 14000 $

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