A real estate developer has the opportunity to develop a parcel of land over the next three years. Here is the relevant information:
Project today is valued at Ksh.216 million.
Development cost today is Ksh.200 million. These costs increase 5% per year.
It costs Ksh.10 million, payable at the beginning of each year, to maintain the land if not developed.
This cost is not incurred if the land is developed.
At any time the land can be sold for Ksh.20 million.
Project's value follows a binomial tree with U = 1.5 and D = 2/3.
Objective probability of the market going up is 0.70.
Risk-free rate is 2.5%.
Required
What is the value of this real estate development project? When should it be developed?