ADVANCED: For illustration, we assumed that the sample building was not occupied. It consisted purely of capital amounts. But in the real world, part of the return earned by a building owner is rent. Now assume that rent of $11,000 is paid strictly at year-end and that both the state of nature (tornado or sun) and the mortgage loan payment happen only after the rent has been safely collected. The new building has a resale value of $120,000 if the sun shines, and a resale value of $20,000 if the tornado strikes. Again, assume a 10% discount rate.
(a) What is the value of the building today?
(b) What is the promised interest rate for a lender providing $25,000 in capital today?
(c) What is the value of residual ownership today?
(d) Conceptual question: What is the value of the building if the owner chooses to live in the building?