You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs0.1q2

to build. After you construct a building on the lot, it will last forever, but you are committed to it: You cannot put another building on the lot. Buildings currently rent at

$101 per square foot per month. Rents in this area are expected to increase in five years. There is a45%

chance that they will rise to $197 per square foot per month and stay there forever and a 55% chance that they will stay at $101 per square foot per month forever. The cost of capital is fixed at 12.4% per year.

a. Should you construct a building on the lot right away? If so, how large should the building be?

b. If you choose to delay the decision, how large a building will you construct in each possible state in five years?

a. Should you construct a building on the lot right away? If so, how large should the building be?

If you choose to delay the decision, how large a building should you construct in the

$197/sq. ft. state in five years?

1- It should be sq. ft. (Round to a whole number.)

If you choose to delay the decision, how large a building should you construct in the

$101/sq. ft. state in five years?

2- It should be sq. ft. (Round to a whole number.)

3- If you wait, what is the expected value of the building today?

The expected value is million. (Round to two decimal places.)

b. If you choose to delay the decision, how large a building will you construct in each possible state in five years?

If you build today, how large a building should you construct?

1- It should be sq. ft. (Round to a whole number.)

2- What is the NPV of the building today? million.(Round to two decimal places.)