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Growth Option: Decision-Tree Analysis Fethe's Funny Hats is considering setting tradematked, orange-haired curly wigs for University of Tennestee football games. The purchase cost for a
Growth Option: Decision-Tree Analysis Fethe's Funny Hats is considering setting tradematked, orange-haired curly wigs for University of Tennestee 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 520,000 per year for 2 years. if demand is bad (60\% probability), then the net cash fows will be $6,000 per year for 2 years. Fethe's cost of capltal is 13%6. Do not round intermediate calculations. a. What is the expected NPV of the project? Negotive value, If any, should be indicated by a minus sign, Round your answer to the nearest doliar. $ 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 payrnent 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 rato which is 7%. Select the correct decision tree
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