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Frank, a retired politician, is thinking about investing 900,000 of his savings to start a new business. He is considering two alternative business opportunities, a
Frank, a retired politician, is thinking about investing 900,000 of his savings to start a new business. He is considering two alternative business opportunities, a political consultancy agency and a barbecue ribs restaurant, but can only accept one investment project. The projected cash flows of the two investments are shown below. Frank asks for your help and advice in reaching a decision on which investment project to accept. He tells you he requires a 8% rate of return on his investment Consultancy Ribs agency restaurant Cash flows 000 000 Initial investment (900) (900) Cash inflows year 1 350 450 Cash inflows year 2 400 425 Cash inflows year 3 450 230 Cash inflows year 4 500 300 Cash inflows year 5 200 230 Cash inflow from sale of the investment at the end of year 5 150 80 Assume the initial investment arises at the start of the first year of the project. The depreciation method is straight line over the project's life. (5 marks) . Assuming cash inflows arise at the end of the year, calculate the net present value of each of the projects. Show your workings. 15 marks)
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