Q Search this ebook Problem Walk-Through Growth Option: Decision-Tree Analysis Fethe's Funny Hats is considering selling trademarked, orange-halred 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 $27,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $3,000 per year for 2 years. Fethie's cost of capital is 14%. Do not round intermediate calculations 3. 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 $ 10000 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 i 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 41% Select the correct decision tree. B 40% Pob Good O 30 000 27.000 27000 27000 27000 20.000* 145) 40% Pob Good Bad 00% P 2 3 . 20000 3000 3000 3000 3000 20 000 (34) - 20.000 3600 Red 3000 0 OP 0 20 000 27000 27.000 0 D 40% 20.000 27000 27000 22.000 27.000 - 20.000 = 1 80% Probe - 20.000 3.000 3.000 60% Prob 0 0 20.000 27000 27.000 0 D 40% Pob Good T = 14% 0 1 2 3 20.000 27.000 27000 27.000 27.000 20.000 (1 = 45) 40% Pob Good T = 14 0 1 3 4 20.000 27.000 27000 27.000 27000 20.000 (1 = 4%) Bul 80% Prob Bad B0% Probe 20 000 3.000 3.000 3.000 3000 20.000 3000 3000 0 0 The correct graphic Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years. Negative values, ir should be indicated by a minus sign. Round your answer to the nearest dollar, $ -11394