Growth Option Decision Tree Analysis 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 $27,000 per year for 2 years If demand is bad (60 probability), then the net cash flows will be $7,000 per year for 2 years Fethe's cost of capital is 10 Do not round intermediate calculations 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 $ 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 4 Select the correct decision tree

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Growth Option: Decision-Tree Analysis Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a

Growth Option: Decision-Tree Analysis

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 $27,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $7,000 per year for 2 years. Fethe's cost of capital is 10%. Do not round intermediate calculations.

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. $
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 4%.
Select the correct decision tree.