CarMax is deciding whether to build a store on plot A or B of land. A bridge is going to be built next to either plot A or B but CarMax is unsure where it will be located. CarMax can purchase either plot of land before the bridge placement is finalized for a predetermined amount of $6 million for A and $9 million for B, these prices are only good for today. These values ($6 million and $9 million) are at a 60% discount if it turns out the bridge is built next to either plot of land. If the land does not have a bridge built, these prices reflect that CarMax has paid a 50% premium over the value of the land. The cost to build a store on either plot is $10 million. If plot A has the bridge built next to it, the store's revenue will be $17 M, If plot B has the bridge revenue will be $26 M. If carmax builds a store and there's no bridge next to it, the revenues will be 50% of if the bridge was placed next to the store (A= $8.5M B=13M). CarMax can only build one store. If CarMax buys land they can sell it at the value, in case the bridge isn't built. Questions: what is the value of each plot of land if it gets the bridge and if it doesn't get the bridge? A = bridge $15 M no bridge $4 M B = bridge $22.5 M no bridge $6 M Would CarMax be profitable if they wait until the bridge is decided before purchasing a plot of land? No A = 15 mill (land) + $10 build cost = $25 M in total cost. Revenue is only $17 M, losing money B = 22.5 M (Land) + 10 = 32.5 M in cost. 26M revenue. Losing money Would CarMax be profitable if they wait until the bridge is decided before purchasing a plot of land? No A = 15 mill (land) + $10 build cost = $25 M in total cost. Revenue is only $17 M, losing money B = 22.5 M (Land) + 10 = 32.5 M in cost. 26M revenue. Losing money Should CarMax purchase a plot of land today (before the bridge is decided)? Yes, only way they have potential to make a profit. What is the potential profit for each plot if the bridge is built next to the plot of land vs if the bridge isn't built and CarMax sells the land? If bridge is placed: A = $6M land + 10 M build cost = 16 M cost. Revenue 17 M = $1M in profit