J&R Construction Company is an international conglomerate with a real estate division that owns the right...

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J&R Construction Company is an international conglomeratewith a real estate division that owns the right to erect an officebuilding on a parcel of land in downtown Sacramento over the nextyear. This building would cost $35 million to construct. Due to lowdemand for office space in the downtown area, such a building isworth approximately $32.5 million today. If demand increases, thebuilding would be worth $38 million a year from today. If demanddecreases, the same office building would be worth only $30 millionin a year. The company can borrow and lend at the risk-free annualeffective rate of 3.8 percent. A local competitor in the realestate business has recently offered $816,000 for the right tobuild an office building on the land. What is the value of theoffice building today? Use the two-state model to value the realoption.

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J&R Construction Company is an international conglomeratewith a real estate division that owns the right to erect an officebuilding on a parcel of land in downtown Sacramento over the nextyear. This building would cost $35 million to construct. Due to lowdemand for office space in the downtown area, such a building isworth approximately $32.5 million today. If demand increases, thebuilding would be worth $38 million a year from today. If demanddecreases, the same office building would be worth only $30 millionin a year. The company can borrow and lend at the risk-free annualeffective rate of 3.8 percent. A local competitor in the realestate business has recently offered $816,000 for the right tobuild an office building on the land. What is the value of theoffice building today? Use the two-state model to value the realoption.