Please provide answers to (b) only. I need to know how to account for 20,000 fra

Question

Please provide answers to (b) only. I need to know how to account for 20,000 franchise fee at the end of year 2 in the cash flow so that I can calculate NPV.

Real Options 1033 Special Toples Fethce's Forecast, in 2 years it will have more information about the local geology and about ice of oil. Kans estimates that if it waits 2 years then the project would cost $9 Moreoverif it waits 2 years, then there is no % chance that the net cash 42 million a year for 4 years and a 10% chance that they would be 2.2 million flows T 4 years, Assume all cash flows are discounted at 10%. company chooses to drill today, what is the projects net present value? decision-free analysis, does it make sense to wait 2 years before deciding Funny Hats is considering selling trademarked, orange -haired curly wigs for a for university of Tennessee football games. The purchase cost for a 2-year franchise to sell the ovies 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 $5000 per year for 2 years, Fethes cost of capital is 10%. ah, what is the expected NPV of the project 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 20000 $. In this case, the cash flows that occurred in Years 1 and 2 will be repeated (so if demand was go in 2, it will continue to be good in Years 3 and 4, write out the decision tree Years 1 and and use decision-tree analysis to calculate the expected NPV of this projectincluding the option to continue for an additional 2 years. NoteThe franchise fee payment at the end of Year 2 is known, so it should be discounted at the risk-free rate, which is 6%. is considering the purchase of a paper company, which would require an ent of SID million Hart estimates that the paper company would provide A 40 million at the end of each of the next 20 years. The cost of capital for purchase the paper company ses is that cash flows will be 40 million a yearbut it realizes that the as likely to be a million a year as 50 million to

Explanation / Answer

Calculate the present value of the $20,000 Franchise fee at the end of the Year 2 and deduct it from the present value of cash inflows. Present value of $20,000 will be calculated as follows:

Present value = 20,000 / (1+0.06)2 = $17,800

$17,800 will be deducted from the present value of cash inflows to calculate NPV.

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