Ben is a retired budget auditor who is currently looking for a new investment opportunity. He is considering two investments: Calzone Zone, a small restaurant specialising in calzone, and Icetown, a skating and curling rink. The projected cash flows of the two investments are shown below.

Ben can only choose one projects, so he asks for your help and advice in reaching a decision on which investment to accept. He tells you he requires a 5% rate of return on his investment.

Calzone                       Zone

Ice town

Cash                          flows

£000                           £000

Initial investment

(885)                           (300)

Cash flows year 1

150                             215

Cash flows year 2

195                             215

Cash flows year 3

200                             215

Cash flows year 4

230                             215

Cash flows year 5

265                             (585)

Assume the initial investment arises at the start of the first year of the project and all the subsequent cash flows occur at the end of the year.

Required:

A. Calculate the net present value of each of the projects. Which project should Ben invest in? Show your workings.

B. Calculate the internal rate of return of each.

Answer rating: 100% (QA)

A Discount rate r required rate of Return 5 or 005 NPV of Calzone Initial Investment Present Value o... View the full answer