Your company owns a parcel of land in a currently undeveloped part of the county

Question

Your company owns a parcel of land in a currently undeveloped part of the county. As the neighboring city grows eastward, you believe there is a 50% chance of residential development, a 20% chance of industrial development, and a 30% chance of no development of the area surrounding the parcel of land. If you build a roller rink and the land is developed residentially the roller rink will have a present worth of $2,000,000. A roller rink in an industrial area will have a present worth of $20,000 and in an undeveloped area a present cost of $3,000,000. The comparable values for a gas station are: residential $250,000, industrial $200,000, and undeveloped $10,000 (present worth, not cost). Based on expected monetary value of net present worth, what, if anything should be done with the land?

Explanation / Answer

As the neighboring city grows eastward, you believe there is a 50% chance of residential development, a 20% chance of industrial development, and a 30% chance of no development of the area surrounding the parcel of land. If you build a roller rink and theland is developed residentially the roller rink will have a present worth of $2,000,000. A roller rink in an industrial area will have a present worth of $20,000 and in an undeveloped area a present cost of $3,000,000. The comparable values for a gas station are: residential $250,000, industrial $200,000, and undeveloped $10,000 (present worth, not cost). Based on expected monetary value of present worth, what, if anything should be done with the land?

A) Build the roller rink

B) Build the gas station

C) Build both

D) Build neither

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