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 (885) 150 Initial investment (300) 215 Cash flows year 1 Cash flows year 2 Cash flows year 3 Cash flows year 4 Cash flows year 5 215 215 215 195 200 230 265 (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. Questions A. Plot the net present value of each of the projects as a function of the required rate of return. (Tip: Use spreadsheet software to calculate NPV using r of 0% - 100% and create a scatter plot) B. Critically evaluate the internal rate of return as a capital investment appraisal tool and discuss the key shortcomings specific to this method.

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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.