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)215Cash flows year 1Cash flows year 2Cash flows year 3Cash flows year 4Cash flows year 5195215200230265215215(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.QuestionA. What are the economic factors reflected in the required rate of return? Discussthe likely effects of the economic shock brought by the COVID-19 pandemic onrates of return required by investors.

Cash flow: The amount of money or money comparable which the organization gets or gives out by the…

Answered: A. What are the economic factors…

A. What are the economic factors reflected in the required rate of return? Discuss the likely effects of the economic shock brought by the COVID-19 pandemic on rates of return required by investors.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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
Cash flows year 1
Cash flows year 2
Cash flows year 3
Cash flows year 4
Cash flows year 5
195
215
200
230
265
215
215
(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.
Question
A. What are the economic factors reflected in the required rate of return? Discuss
the likely effects of the economic shock brought by the COVID-19 pandemic on
rates of return required by investors.

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