XU Development Inc. is considering purchasing and developing a $50-$acre farm to sell as a

housing development. Information on the project:

Cost of land $=$$$5M$

Development Expenditures $=$$$20M$

Expected net revenue from sales one year after the development $=$$$30M$

Expected revenue is based on a $\mathrm{.}5$ probability of receiving $$60M$ and $\mathrm{.}5$ probability of

not selling the development and receiving nothing.

Cost of Capital $=\mathrm{.}20$

$1$A: Using the NPV approach, should project be undertaken?

Suppose the risk of the project can be attributed to the uncertainty of whether an Amazon Hub will

be developed in a nearby location. If this occurs, XU is certain that it will be able to sell the housing

development for $$60M$; if not they see no sale. Furthermore, suppose Amazon indicates there is a

$0\mathrm{.}5$ probability the will decide to develop the hub on the location site and will decide in one year.

$1$B: Explain how ESD can view the project as an option.

$1$C: If the project's cost of capital is $10\%$ with the Hub secured, what is the NPV of

developing the land in year one?

$1$D: What is the expected NPV of the project if ESD views it as an option?