A local couple is deciding to invest their life savings of $68,000.00 into a Fijian business. They are considering two businesses. Business A, in the food and beverage (FNB) industry, provides an annual cash income of about $8,000 for 10 years. Business B, in the clothing and textiles industry, provides an annual cash income of $7,500 for 11 years commensurate with their level of investment. If the couple on the other hand decides to leave their life savings into a fixed deposit at their current bank, which is a large international bank, they would get about 1.5 percent per annum. The economy is currently in the expansionary phase of the business cycle. However, it is forecasted that a severe global downturn is expected in 1 year’s time and the resulting recession will last about 1 year thereafter. 

During the recession, it is expected that cash flows in the FNB industry will fall by 40 percent per annum. In the clothing and textiles industry, it is expected that cash flows will fall by about 35 percent per annum. The general elections are expected to be held in 4 years’ time. Policy changes around taxation could be expected but at present are uncertain. 

Required: 

Calculate the present value of the cash inflows of both alternatives and compare it against the investment required. Clearly show which investment is preferred Identify and discuss the key risks faced by the couple in each scenario Against the type of risks involved, please discuss which investment would you choose.

Answer rating: 100% (QA)

Solution The present value of the cash inflows of both alternatives can be calculated using the foll... View the full answer