Answered step by step
Verified Expert Solution
Question
1 Approved Answer
please do on excel and show functions please 2. Your uncle is a prod owner of an up-market clothing store. Because business is down, he
please do on excel and show functions please 2. Your uncle is a prod 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 has hired a financial adviser to estimate the cash flows of the new Department. After 6 months of hard work, the financial advisor came up with the following calculations: ( 10 points) The discount rate is 12% and there are no addition taxes. Thus, the financial advisory calculated the NPV as follows: NPV =67,000+(7,000/0.12)=8,667. Please note that the $7,000 is the total annual cash flow. Assuming the clothing store will stay forever; therefore, you will have annual cash flow of $7,000 forever. Thus, you treat it as a perpetuity. The PV of all future cash flows = Annual cash flow / discount rate =7,000/.12. Thus, the NPV=67,000+(7,000)/.12= 8,667 . To find the IRR, it should be 67,000+(7,000/IRR)=0 where IRR=10.45% Your surprised uncle asked you (a promising finance student) to go over the calculation. After taking a close look, you identify two mistakes: (1) Although municipal taxes do not change as a result of the replacement of the tie department, the financial advisor has attributed a part of the existing municipal taxes to the cost of the store change. (2) The "payment for financial advisor" will be paid even if we do not rearrange the shop. What are the correct NPV and IRR of the project
please do on excel and show functions please
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started