J&R Construction Company is an international conglomerate with a real estate divisionthat owns the right to erect an office building on a parcel of land in downtownSacramento over the next year. This building would cost $40 million to construct. Dueto low demand for office space in the downtown area, such a building is worthapproximately $38 million today. If demand increases, the building would be worth$42.3 million a year from today. If demand decreases, the same office building wouldbe worth only $35 million in a year. The company can borrow and lend at the risk-freeannual effective rate of 5.5 percent. A local competitor in the real estate business hasrecently offered $821,000 for the right to build an office building on the land. What isthe value of the office building today? Use the two-state model to value the realoption. (Do not round intermediate calculations and enter your answer in dollars,not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)Building value

To value the real option, we can use a two-state model, where the building will either be…

recently offered $821,000 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., 1,234,567.89.) Building value

recently offered $821,000 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., 1,234,567.89.) Building value

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Talbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?
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 down- town Sacramento over the next year. This building would cost $65 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $58.7 million today. If demand increases, the building would be worth $70.4 million a year from today. If demand decreases, the same office building would be worth only $55.2 million in a year. The company can borrow and lend at the risk-free annual effective rate of 4.8 percent. A local competitor in the real estate business has recently offered $1.8 million for the right to build an office building on the land. Should the company accept this offer? Use a two-state model to value the real option.
Y7 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 $32 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $31 million today. If demand increases, the building would be worth $33.2 million a year from today. If demand decreases, the same office building would be worth only $29.5 million in a year. The company can borrow and lend at the risk-free annual effective rate of 6.5 percent. A local competitor in the real estate business has recently offered $768,000 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.,…
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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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Ancer Food Enterprises, Inc. is considering launching a new corporate project. The company will have to make Capital Investments, Invest in Net Working Capital, and generate Cash Flows from Operating the new project. The Equipment required for the project will cost $8,700,000, will last for six years (the length of the project), and is estimated to be worthless at the end of its useful life. The initial investment in Net Working Capital needs to be $400,000, while the year-end investment in NWC for years 1 - 5 will be 20% of the current year's sales; ending Net Working Capital at the end of year six will be zero. Year One's sales will be $5,200,000 with annual growth at 5%; operating expenses will be 40% of sales. The company uses Straight-Line depreciation and has a Tax Rate of 22%. The appropriate discount rate for the risks involved is 12%. By how much does the Net Present Value of this project change if improved Working Capital Management cuts the required investment in Net…
Ancer Food Enterprises, Inc. is considering launching a new corporate project. The company will have to make Capital Investments, Invest in Net Working Capital, and generate Cash Flows from Operating the new project. The Equipment required for the project will cost $8,700,000, will last for six years (the length of the project), and is estimated to be worthless at the end of its useful life. The initial investment in Net Working Capital needs to be $400,000, while the year-end investment in NWC for years 1 - 5 will be 20% of the current year's sales; ending Net Working Capital at the end of year six will be zero. Year One's sales will be $5,200,000 with annual growth at 5%; operating expenses will be 40% of sales. The company uses Straight-Line depreciation and has a Tax Rate of 22%. The appropriate discount rate for the risks involved is 12%. By how much does the Net Present Value of this project change if improved Working Capital Management cuts the required investment in Net…