Problem $14-08($Growth Option: Option Analysis$)$ Question $7$ of $7$ Check My Work $(5$ remaining$)$ 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 for a franchise to sell the wigs is $\backslash (\backslash$$ $20,000\backslash ).$ If demand is good $(\backslash (40\backslash \%\backslash )$ probability$),$ then the net cash flows will be $\backslash (\backslash$$ $25,000\backslash )$ per year for $2$ years. If demand is bad $\backslash (60\backslash \%\backslash )$ probability$),$ then the net cash flows will be $\backslash (\backslash$$ $5,000\backslash )$ per year for $2$ years. Fethe's cost of capital is $\backslash (10\backslash \%\backslash ).$ a$.$ What is the expected NPV of the project? Round your answer to the nearest dollar. of $\backslash (\backslash$$ $20,000\backslash ).$ 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 in Years $3$ and $4).$ Use the Black$-$Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 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 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 $$25,000$ per year for $2$ years. If demand is bad $(60\%$ probability$),$ then the net cash flows will be $$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.

$

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 $4).$ Use the Black$-$Scholes model to estimate the

value of the option. Assume the variance of the project's rate of return is $0\mathrm{.}2077$ and that the risk$-$free rate is $8\%.$ 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: $and the risk$-$free rate is $\backslash (8\backslash \%\backslash ).$ 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: $\backslash (\backslash$$ $\backslash )$ Value of the entire project: $\backslash$$