A hotel owner is about to renew his lease contract of the buildings in which the hotel is located The hotelling business is vulnerable to business cycles, and the hotel owner tries to estimate the consequences of introducing the following items in the renewed contract i) The hotel owner has the right to scale down his operations (capacity down 20%) during the next two years. The owner of the buildings must take over the freed area. ii) The hotel owner has the right to scale up his operations (capacity up 25%) during the next two years. The owner of the buildings must then make extra area available. Future development of (static) present values of hotel operations over the next two years is represented by the binomial tree below. The risk free rate is 4%. 625 500 t=0 400 400 320 256 Assume that by scaling down the hotel owner receives the one-time amount 95, whereas increas ing the capacity carries a one-time cost of 135. a) By a real option analysis, what is the present value of the hotel operation assuming the contract item regarding a scaling down is in effect? b) What is the contract item regarding scaling up worth, valued in isolation? What is the value of the extended flexibility of having both items effective in the con- c) tract