Real Estate Finance

posted by .

A developer is interested in a parcel of land for a small mixed use development. Similar developments are worth $15 million and require the following sequential investments to complete:
Phase Description
1 Purch. land, permitting, utilities
2 Build retail
3 build apartment

Cost Time to complete
3 million 1 year
10 million 2 years
7 million 2 years

The volatility of the development value is 25% and the risk-free rate of interest is 3%. Due to competition the developer knows that the project will have to be completed in the next 6 years or not at all.

1. If the developer has to make a decision today (ie. invest today or do not invest at all) and assuming that a suitable discount rate for the project is the risk free rate plus 3% premium, should the project be undertaken?

2. Using the data provided above, give the developer some advice on how to proceed with this opportunity?

3. What is the probability that the development will actually be completed?

4. Suppose that after a careful examination of the data, the volatility is though to be lower than first anticipated for this project. What level kills the optionality in the investment and will force the developer to walk away from this opportunity?

5. Explain why your answer to number 4 above makes sense. That is, what is the relationship between volatility and the value of an option in the context of this investment decision?

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. math

    A land developer wants to develop 20 acres of land. Each lot in the development is to be 5/4 of an acre. How many lots will the land developer have in the 20 acres?
  2. math 156

    A land developer wants to develop 20 acers of land. Each lot in the development is to be 4/5 of an acer. How many lots will the developer have in 20 acers?
  3. Finance- Real Estate....really need help!!!

    A developer is interested in a parcel of land for a small mixed use development. Similar developments are worth $15 million and require the following sequential investments to complete: Phase Description 1 Purch. land, permitting, …
  4. pre cal

    A rectangular parcel of land has an area of 4,000 ft2. A diagonal between opposite corners is measured to be 10 ft longer than one side of the parcel. What are the dimensions of the land, correct to the nearest foot?
  5. ACCOUNTING

    On March 1, 2012, Enrique Company acquired real estate, on which it planned to construct a small office building, by paying $90,504 in cash. An old warehouse on the property was demolished at a cost of $7,646; the salvaged materials …
  6. Real Estate Finance

    Jones family spends an average of $105 on utilities every two months. How much do they spend on utilities in a ear?
  7. Math

    A rectangular parcel of land has an area of 2,000 ft2. A diagonal between opposite corners is measured to be 10 ft longer than one side of the parcel. What are the dimensions of the land, correct to the nearest foot?
  8. Finance

    Following are selected balance sheet accounts for Third State Bank: vault cash  $2 million; U.S. government securities  $5 million; demand deposits  $13 million; nontransactional accounts  $20 million; cash items in process of …
  9. Finance

    Calculate the project’s initial Time 0 cash flow, taking into account all side effects.?
  10. pre calculus

    A rectangular parcel of land has an area of 4,000 ft2. A diagonal between opposite corners is measured to be 10 ft longer than one side of the parcel. What are the dimensions of the land, correct to the nearest foot?

More Similar Questions