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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
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 55.000 per year for 2 years. Fethe's cost of capital is 14%. 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 free rate, which is Select the correct decision tree. A 405 Peb Good 40Pb 20000 20000 20000 20000 20000 - 20.000 145) 149 2 20000 5000 5000 1.000 1.000 - 20000 (0) Good 40P Good 2 20000 20000 20000 20000 20000 - 20 000(0) 60 Pro 00% Po 50 20 000 5000 5000 20.000 26.000 28.000 30 000 5000 5000 5000 5000 D 40 Probe Good 2 30.000 28000 28000 28000 28000 20000 ( 10) 60% Pro 20.000 5000 5000 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 5 Check My Work
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