Winner Investment Company (WIC) is going to bid for a commercial site that could be developedinto an office building. After completion, the building can provide a floor area of 600,000 rent-ablesquare foot. By using the latest construction method, WIC can complete the project in one year andthe building cost is estimated to be $500 per square foot.

Currently, WIC believes that the chance to receive an average rent of $90 per square foot is 60% andthe chance to receive $60 per square foot is 40% after one year. Assume operating expenses arealways equal to 30 percent of the rent received. WIC expects rent can grow at 3 percent indefinitelyand it requires a 12 percent return on investment.

(a) Find the expected net operating income from the office building and also thecapitalization rate.

(b) Calculate the expected property value and land value under the above assumptions.

(c) Suppose the land site is selling at $50,000,000. Base on your answer in part (b), is theoffice project profitable?

(d) Calculate the land value again by using Real Option Approach.