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 $27,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $9,000 per year for 2 years. Fethe's cost of capital is 14%.
A. What is the expected NPV of the project? B. Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years.
B. Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years.