Question 1:

J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $42 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $41.5 million today. If demand increases, the building would be worth $42.7 million a year from today. If demand decreases, the same office building would be worth only $41 million in a year. The company can borrow and lend at the risk-free annual effective rate of 2.5 percent. A local competitor in the real estate business has recently offered $483,000 for the right to build an office building on the land.

What is the value of the office building today? Use the two-state model to value the real option.(Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, roundedto 2 decimal places, e.g., 1,234,567.89.)

Question 2:

Gasworks, Inc., has been approached to sell up to 2.8 million gallons of gasoline in three months at a price of $2.70 per gallon. Gasoline is currently selling on the wholesale market at $2.40 per gallon and has a standard deviation of 62 percent.

If the risk-free rate is 7 percent per year, what is the value of this option? Use the two-state model to value the real option.(Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, roundedto 2 decimal places, e.g., 1,234,567.89.)