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Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a 2-year franchise to sell
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a 2-year franchise to sell the wigs is $20,000. If demand is good (40% probability), then the net cash flows will be $28,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $6,000 per year for 2 years. Fethe's cost of capital is 11%. Do not round intermediate calculations. a. What is the expected NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest dollar. b. If Fethe makes the investment today, then it will have the option to renew the franchise fee for 2 more years at the end of Year 2 for an additional payment of $20,000. In this case, the cash flows that occurred in Years 1 and 2 will be repeated (so if demand was good in Years 1 and 2, it will continue to be good in Years 3 and 4). Write out the decision tree. Note: The franchise fee payment at the end of Year 2 is known, so it should be discounted at the risk-free rate, which is 8%. Select the correct decision tree. r= 8% 0 1 2 3 4 - 20.000 28.000 28.000 28.000 28.000 - 20.000 (r = 11%) T= 11% 0 1 2 3 4 40% Prob/ 7- 20.000 6.000 6.000 6.000 6.000 Good / - 20.000 (r = 8%) Good Bad 60% Prob Bad 60% Prob - 20.000 6.000 6.000 0 0 - 20.000 28.000 28.000 0 0 D 40% Prob r = 11% 0 2 20.000 28.000 28.000 28.000 28.000 - 20.000 (r = 8%) r = 11% 40% Prob 7- 20.000 28.000 28.000 28.000 Good 28.000 - 20.000 (r = 8%) Good Bad 60% Prob Bad 60% Prob - 20.000 6.000 6.000 6.000 6.000 - 20.000 6.000 6.000 0 0 The correct graph is -Select- . Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years. Negative values, if any, should be indicated by a minus sign. Round your answer to the nearest dollar
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