Your uncle is a proud owner of an up-market clothing store. Because business is down he is considering replacing the languishing tie department with a new sportswear department. In order to examine the profitability of such move he hired a financial advisor to estimate the cash flows of the new department. After six months of hard work the financial advisor came up with the following calculation:

Investment (at t=0)

Your surprised uncle asked you (a promising finance student) to go over the calculation. What are the correct NPV and IRR of the project?

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Rearranging the shop 40,000 Loss of business during renovation 15,000 Payment for financial advisor 12,000 Total 67,000 Profits (from t-1 to infinity) Annual earnings from the sport department 75,000 Loss of earnings from the tie department -20,000 Loss of earnings from other departments* -15,000 -18,000 -15,000 7,000 Additional worker for the sport department Municipal taxes Total * Some of your uncle's stuck up clients will not buy in a shop that sells sports wear The discount rate is 12%, and there are no additional taxes. Thus, the financial advisor calculated the NPV as follows: -67,000+ 7,000 0.12 =-8,667