(a) If you build the condominium units today, how many condominium units will you build? What is the value of the lot in this case? (b) If you build the condominium units next year, what is the value of the lot today? (c) Calculate the value of option to delay
An investor owns a lot that is suitable for either 6 or 9 condominium units. The per unit construction costs of the building with 6 units are $60000 and 9 units are $75000. Construction costs are the same whether construction takes place this year or next. The current market price of each unit is $100000. The per year rental rate is $7000 per unit (net of expense), and the risk-free rate of interest is 9% per year. If the market conditions are favourable next year, each condominium will sell for $130000. If conditions are unfavourable, each will sell for only $95000. Assume that once the construction take place, you can sell the condominium units immediately and receive the value of the unit. (a) If you build the condominium units today, how many condominium units will you build? What is the value of the lot in this case? (b) If you build the condominium units next year, what is the value of the lot today? (c) Calculate the value of option to delay
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