You have been approached by a real estate conglomerate with a deal: You can buy 100,000 thousand square feet of space in a mall at $50/square foot. Over the next 10 years (2020 - 2029), you expect to make an after-tax cash inflow of $500,000 a year. At the end of 10 years, you expect to be able to sell the space back at $5 million to other investors.

a. From a standard capital budgeting analysis, would you take the project if your discount rate were 15%?

b. Assume that, as an inducement, the promoters offer to give you the option to buy another 100,000 square foot at todays price anytime over the next five years. The five-year bond rate is 6%, and the prices per square foot for the last six years have been as follows:

Year Price / Square Foot

2014 $20 2015 $30 2016 $55 2017 $70 2018 $55 2019 $50