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Just need help on part b. please help!! ethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The
Just need help on part b. please help!!
ethe'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 0 sell the wigs is $20,000. If demand is good (40\% probability), then the net cash flows will be $25,000 per year for 2 years. If demand is bad (60\% probability). then the net cash fows will be $5,000 per year for 2 years. Fethe's cost of capital is 10%. a. What is the expected NPV of the project? Round your answer to the nearest dollar. 5 b. If Fethe makes the investment today, then it wili have the option to renew the franchise fee for 2 more years at the end of Year 2 for an additional payment of 520,000 . 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). Use the Biack-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.3975 and that the risk-free rote is 8%. Do not round intermediate caiculations. 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: 5 Value of the entire project: 5 Step by Step Solution
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