Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Look at pic and actually answer the question correctly or I will report you! Growth Option: Decision-Tree Analysis Fethe's Funny Hats is considering selling trademarked,
Look at pic and actually answer the question correctly or I will report you!
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 $25,000 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. 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. 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 8%. Select the correct decision tree. c D 40% Prob 20 ooo 25000 Proly 20 ooo 7100 The correct graph . 25100 25100 25000 7000 7000 7000 40% Prob 20 ooo Proly 20 ooo 25000 7 too 25100 25100 25100 7000 40% Prob 20 ooo 25000 Proly 20 ooo 7100 25100 25100 25100 7000 40% Prob 20 ooo 7100 Proly 20 ooo 25000 7000 7000 7100 25000 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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started