Merchant Real Estate Trust (MRET) buys and develops property for long- term rental to clients such as restaurant chains and department stores. MRET is interested in acquiring land near Exit 44 of Interstate I-75, because discount retailer Mega Mart may build a large super center store on 6 acres of land nearby. If the Mega Mart Super Center is built, sev- eral smaller 2-acre properties nearby would become prime locations for small retail outlets and casual dining restaurants, as customer traffic in the area would increase significantly. However, Mega Mart's plans are not yet public; MRET is guessing Mega Mart's plans by monitoring their activi- ties in the area. MRET's theory will be confirmed if Mega Mart applies for zoning permission to build the super center, at which point MRET expects the price of the nearby -acre properties to double. MRET is highly confident that Mega Mart will move ahead with the super center project, estimating that the prob- ability of Mega Mart applying for zoning permission and building the super center is 65%, while the probability of applying but not receiving permission and thus canceling the project is 25%.

Questions 

1. What are the future states of nature in MRET's decision scenario? What type of risk is MRET exposed to? 

2. MRET estimates that purchase and development of a single 1/2-acre property near Mega Mart's site has a net present value of \($1,000,000\) if the land is purchased while the prices are low and the super center is built. However, if MRET buys the land and the super center is not built, this will represent an overall loss of \($100,000\) for MRET. What is the expected value of MRET's opportunity to buy a single -acre property for development? 

3. The direct cost of a single -acre property is currently \($200,000\). If MRET buys at this price, it also has the option of selling the land to other developers for double that amount when Mega Mart publicly applies for super center zoning permission.

If Mega Mart does not apply for permission within the next 3 months, then MRET would sell back the land, incurring the overall loss of \($100,000\), mostly in adminis- trative expenses. What is the expected value of buying a single -acre property now and selling it again, after either Mega Mart applies for zoning permission or within the next 3 months, whichever occurs first?