Ben is a retired budget auditor who is currently looking for a new investmentopportunity. He is considering two investments: Calzone Zone, a small restaurantspecialising in calzone, and Icetown, a skating and curling rink. The projected cashflows of the two investments are shown below.Ben can only choose one projects, so he asks for your help and advice in reaching adecision on which investment to accept. He tells you he requires a 5% rate of returnon his investment.CalzoneIcetownZoneCash flows£000£000Initial investment(885)150(300)215215Cash flows year 1Cash flows year 2Cash flows year 3Cash flows year 4Cash flows year 5195200215230215265(585)Assume the initial investment arises at the start of the first year of the project and allthe subsequent cash flows occur at the end of the year.A. Calculate the net present value of each of the projects. Which project shouldBen invest in? Show your workings.B. Calculate the internal rate of return of each of the projects. Which project shouldBen invest in? Show your workings.(Tip: You may use the IRR function in spreadsheet software)

Answer: A Whichever project has the higher NPV is the more profitable and should be a priority and…

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 of the projects. Which project should Ben invest in? Show your workings. (Tip: You may use the IRR function in spreadsheet software)

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 of the projects. Which project should Ben invest in? Show your workings. (Tip: You may use the IRR function in spreadsheet software)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

100%

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
Icetown
Zone
Cash flows
£000
£000
Initial investment
(885)
150
(300)
215
215
Cash flows year 1
Cash flows year 2
Cash flows year 3
Cash flows year 4
Cash flows year 5
195
200
215
230
215
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.
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 of the projects. Which project should
Ben invest in? Show your workings.
(Tip: You may use the IRR function in spreadsheet software)

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