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A Korean Auto-Part Supplier Is Evaluating an Investment Project to Build

Question 3

Essay

A Korean auto-part supplier is evaluating an investment project to build a manufacturing plant close to Kia
Automobile Assembly Plant near West Point, Georgia. The supplier can obtain a 1-year option to buy the
required parcel of land near West Point area and if the land is purchased the price would be $1,500,000. The
land option, if purchased, would expire 1-year from now. The supplier has two years to make a decision on
whether to build the plant and start operations, once the land was purchased. The required capital investment
would be $5,000,000. They estimate that the land, if purchased, could be sold for 110% of its purchase price
anytime over next two years.
What would the company be willing to pay for the combined value of the land option? A Korean auto-part supplier is evaluating an investment project to build a manufacturing plant close to Kia Automobile Assembly Plant near West Point, Georgia. The supplier can obtain a 1-year option to buy the required parcel of land near West Point area and if the land is purchased the price would be $1,500,000. The land option, if purchased, would expire 1-year from now. The supplier has two years to make a decision on whether to build the plant and start operations, once the land was purchased. The required capital investment would be $5,000,000. They estimate that the land, if purchased, could be sold for 110% of its purchase price anytime over next two years. What would the company be willing to pay for the combined value of the land option?

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