Question: Suppose there is a 50% chance that the project next year will be worth $2.6 million and a 50% chance that it will be worth only $1.8 million, with the construction cost still $1.9 million in both cases. The project today would certainly be worth $2 million and cost $1.8 million, as before.
a. Under these circumstances (and still assuming a 25% required return on land), how much is the land worth today?
b. Explain why the land is worth more in this problem than in the previous problem. Also explain why it is better not to build the project today even though there is a 50% chance the project will be unprofitable next year.