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Growth Option: Option Analysis Fethe's Funny Hats is considering selling trademarked, orange - haired curly wigs for University of Tennessee football games. The purchase cost
Growth Option: Option Analysis
Fethe's Funny Hats is considering selling trademarked, orangehaired curly wigs for University of Tennessee football
games. The purchase cost for a year franchise to sell the wigs is $ If demand is good probability
then the net cash flows will be $ per year for years. If demand is bad probability then the net cash
flows will be $ per year for years. Fethe's cost of capital is
a What is the expected NPV of the project? 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 more years at the
end of Year for an additional payment of $ In this case, the cash flows that occurred in Years and will
be repeated so if demand was good in Years and it will continue to be good in Years and Use the Black
Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is
and that the riskfree rate is Do not round intermediate calculations. Round your answers to the nearest dollar.
Use computer software packages, such as Minitab or Excel, to solve this problem.
Value of the growth option: $
Value of the entire project: $
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