Read the following scenario:

Jennifer is a real estate developer. She is developing a site on which an office building will be built. The office building will be complete at the end of 12 months, and once it is done it will have a realization value of $8 million. Similar new, stabilized property assets in the area give expected returns of 0.75% per month. Construction costs will be paid as two payments of $2 million each at the end of 6 and 12 months. The current risk-free rate is 3.04% per year (0.25% per month).

1.1 Suppose the building to be built is preleased, so there is no lease-up risk (i.e., the project is not speculative). What is the present value (as of the end of Month 0) of the asset to be built?

1.2 Suppose that, measured in terms of simple monthly returns, the opportunity cost of capital (OCC) of construction costs is 5 basis-points (0.05%) above the risk-free rate. What is the OCC of construction costs?

1.3 What is the present value (i.e., Month 0) of the first construction payment, which occurs at the end of Month 6?

1.4 What is the present value (i.e., Month 0) of the second construction payment, which occurs at the end of Month 12?

1.5 What is the present value (i.e., Month 0) of the total construction costs of the project?

1.6 What is the net present value (NPV) of the project, excluding the cost of land?

1.7 What is the economic value (opportunity cost) of the land (i.e., the maximum bid price for the land to achieve an NPV greater than 0, including the cost of land)?

1.8 Suppose the price of land is $4,000,000. What is the NPV of the development project? Should Jennifer undertake this project now?

1.9 Provide two reasons why the (fair market value) price of land might be greater than the NPV of Jennifer's project.