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 $28,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $4,000 per year for 2 years. Fethe's cost of capital is 10%. 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. $ 3603.3 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 6%. Select the correct decision tree. A B C 2 4 40 ,000 4,000 = 10% 3 20.000 4.000 4.000 4.000 4.000 - 20,000 (r = 6%) 40% Prob. Good 1 2 3 4 20.000 28.000 28.000 28.000 28.000 - 20.000(r = 6%) 40% Prch Good r = 10% 0 1 2 3 4 4 20.000 28.000 28.000 28.000 28.000 - 20.000 (r = 6%) Good Bad Frob - 20.000 28.000 28.000 Bad 60 Pre - 20.000 4.000 4.000 4.000 4.000 Bad 60% Prob 0 20.000 4.000 4.000 D 40 % Pob Good = 6% 0 0 1 2 3 4 20.000 28.000 28.000 28.000 28.000 - 20,000 (r = 10%) Bad 60% Prob 20.000 4.000 4.000 0 0 The correct graph is c 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. $ 403.20 Hide Feedback Partially Correct