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 to sell the wigs is $20,000. If demand is good (40% probability), then the et cash flows will be $25,000 per year for 2 years. If demand 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 wil 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 0.2051 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 proiect: $
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 to sell the wigs is $20,000. If demand is good (40% probability), then the et cash flows will be $25,000 per year for 2 years. If demand 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 wil 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 0.2051 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 proiect: $
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Growth Option: Option Analysis 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. $ 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: $
Transcribed Image Text: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 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 0.2051 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: $
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