Chapter Problems 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 $22,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $6,000 per year for 2 years. Fethe's cost of capital s 14%. 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 il 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 B 40% Prob Good 14% 2 4 20.000 22000 22000 22000 22000 20.000 (0%) 405 Pob Good 0 1 2 20.000 22000 22000 22000 22.000 20.000 (14) Bad Bad 50% Prob 20.000 6.000 6,000 60 Probe - 20.000 0.000 0 0 6,000 O O D 4 40 Pro Good 20.000 0.000 6000 6000 6.000 20.000(0) 40% Pob Good 0 1 20.000 22.000 22000 22000 22.000 - 20.000 (39) Bad 80% Prob Bad 60 Pro - 20.000 6000 - 20.000 22.000 22.000 0 6.000 6.000 0.000 14 m.009 6,09 6000 000 60 17 E 556 40% Prob Good ** 30.000 0.000 6000 6000 0.000 20.000 (t = B% +4 2 3 .000 22 600 23 009 22.000 2009 20.ooo( = B8% 20,000 22,000 22.009 0 The correct graph is-Select- 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 l: +44: MA1