A property developer is considering taking advantage of the current increase in people working from home. It believes th

[answerhappygod]

A property developer is considering taking advantage of the
current increase in people working from home. It believes that it
is possible to create a block of 500 new ‘personal distance’
offices with high-speed interconnections and ‘smart rooms’ that
will be attractive to employers once the pandemic threat recedes.
The current estimate of the rental revenue per office unit per year
is £41,250. The cost of servicing each office unit is £20,000 per
year. The riskless rate of return – which is used by the project
planners to discount all monetary flows - is 5%. If the project is
undertaken this year, it will cost £67.5 million and generate
revenue starting now. Once built, the offices are expected to
generate the same annual costs and revenues forever.
(a) What is the NPV if the project is undertaken now?
(b) Now suppose that next year, when the current uncertainty is
resolved, the rental revenue per unit per year is expected either
to rise to £90,000 (the recovery state, with a probability 25%) or
to fall to £25,000 (the ‘long Covid’ state, probability 75%) – and
to remain at that level forever. If the decision about whether to
build the offices is delayed till next year, the project cost will
change - to £75 million in the recovery state or £52 million in the
long Covid state, but the annual servicing cost will remain at
£20,000 per unit per year. What is the NPV of the project being
delayed?
(c) When (if at all) should the project be undertaken and what
is the option to delay the project worth to the developer?
(d) A university student living in the town points out that the
project is risky (at least in the first year). How would this be
taken into account?