a. What is the expected NPV of the project? Round your answer to the nearest dollar. $ 2562 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 0.2624 and that the risk-free rate is 6%. 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: $

a. What is the expected NPV of the project? Round your answer to the nearest dollar. $ 2562 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 0.2624 and that the risk-free rate is 6%. 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: $

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter26: Real Options

Section: Chapter Questions

Problem 5P

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