A Real Estate Developer Buys 70 Acres of Land in a Rural

question 68

Essay

A real estate developer buys 70 acres of land in a rural area, planning to build a subdivision on the land if and when the population from the city begins to expand into the area. If population growth is less than anticipated, the developer believes that the land can be sold to a country club that would build a golf course on the property.
a. In what way does the possibility of sale to the country club provide a put option to the developer?
b. What is the exercise price of the option? The asset value?
c. How does the golf course option increase the NPV of the land project to the developer?

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Definitions:

Enthymeme

A syllogism in which one of the premises is implicit or assumed rather than explicitly stated.

Hedge Fund

A pooled investment fund that employs different strategies to earn active return, or alpha, for their investors.

Government-insured Deposits

Financial safeguards provided by the government for bank deposits, ensuring the safety of individual's money in the event of bank failure.

Enthymeme

A rhetorical argument that is essentially a syllogism with one premise left unstated.