Disney is considering entering into a joint venture to build condominiums in Vail, Colorado, with a local real estate developer. The development is expected to cost \($1\) billion overall and, based on Disney’s estimate of the cash flows, generate \($900\) million in present value cash flows over 25 years. Disney will have a 40% share of the joint venture (requiring it to put up \($400\) million of the initial investment and entitling it to 40% of the cash flows) but it will have the right to sell its share of the venture back to the developer for \($300\) million anytime over the next five years. (The project life is 25 years.)

a. If the standard deviation in real estate values in Vail is 30% and the riskless rate is 5%, estimate the value of the abandonment option to Disney.

b. Would you advise Disney to enter into the joint venture?

c. If you were advising the developer, how much would he need to generate in present value cash flows from the investment to make this a good investment?