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.
