Q2. [PV calculation] You own a small company that is contemplating construction of a suburban office block. The cost of buying the land and constructing the building today is $700,000. Your real estate adviser forecasts a shortage of office space and predicts that you will be able to sell next year for $800,000. Assume the discount rate r=7%, how much is it worth today?

[NPV calculation] Following Q2, Whats the net present value of the project?

[Opportunity Cost of Capital] In Q2, you assumed that the future cash flow of the project is risk-free, therefore, you used annual return of U.S. Treasury debt securities (safe asset) 7% as cost of capital in Q2 calculation. Now assume everything else remains the same, however, the project is as risky as investment in the stock market providing a 12% return at the same risk level. Whats the NPV now?

[DCF] Your real estate advisor has come back with some revised forecasts. He suggests that you rent out the building for two years at $30,000 a year, and predicts that at the end of that time you will be able to sell the building for $840,000. Should you invest in this project?