Question

alternatives? rate that makes you indifferent between the two 2. (Sunk costs) Your uncle is a proud owner of an up-market clou Because business is down, he is considering replacing the lan it with a new sportswear department. In order to examine the itability of such move, he has hired a financial advisor to estimate flows of the new department. After 6 months of hard work, the financ sor came up with the following calculation: up-market clothing store. eplacing the languishing tie T to examine the prof- cial advisor to estimate the cash ths of hard work, the financial advi- t=0 A 2 Investment 3 Rearranging the shop 4 Loss of business during renovation 5 Payment for financial advisor 6 Total -40,000 - 15,000 -12,000 -67,000 <-- =SUM(B3:35) D I B C 3 Annual profits 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 Additional worker for the sport department -18,000 Municipal taxes -15,000 Total 7,000 <-- =SUM(B9:B13) Some of your uncle's stuck-up clients will not buy in a shop that sells sportswear.

Answer 1

Sunk cost as such cost is already incurred is ignored while checking the viability of the project in Capital Budgeting. Opportunity cost is considered.

Initial Investment	=40000+15000	$55000
Annual Earnings	=7000+15000	$22000
NPV	=-55000+(22000/0.12)
	$128333.333333333
IRR
55000=	22000/i
i=	=(22000/55000)*100
irr	=40%