Real Estate Finance - Real options valuation, Finance Basics

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I need to understand a practice question for exam, but I only have a partial solution. I need a more detailed solution, so can understand how to arrive at the answer.

The problem can be solved by either risk-netural valuation or by replicating portfolios. Primarily, I want the risk netural valuation solution, but depending on the price, it could be valuable for me to see both methods.

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