According to real option theory, even if construction were instantaneous and the property market were perfectly liquid, it might be optimal not to immediately build a project whose value currently exceeds its construction cost, because:
A) There is sufficient probability that the value of the project will rise sufficiently in the future, and building today is mutually exclusive with building in the future.
B) There is sufficient probability that the value of the project will fall sufficiently far in the future such that you would lose money if you built it today.
C) There is never any reason to exercise a call option before its expiration date.
D) The cost of construction can be invested at a rate less than the cap rate or current cash yield) of the completed project.

Question

Quizplus · Accepted Answer

A) Real option theory suggests that even if a project's value exceeds its construction cost, it might be optimal to wait if there's a significant chance the project's value will increase further. This is because the decision to build now precludes the opportunity to build in the future, potentially at a higher profit.

According to Real Option Theory, Even If Construction Were Instantaneous