Question 1 Investment decision [19]

Lord Farquaad is considering two business ideas and require you to advise him which of the businesses are feasible and he should pursue. He is considering a fast-food outlet in the central business district and a food truck, which he feels would compliment his fast-food business, to sell food at sporting and other events. His research has revealed the following cash flow projections. An economist told him to use a 6% inflation rate and that he considers a 10% return over a six-year term as a good investment.

Fast-food outlet Food truck

Cash investment required 2 500 000 750 000

Equipment life span 15 years 8 years

First year net cash flow 233 867 213 450

1.1 Using discounted cash flows advise Lord Farquaad on which of the businesses are feasible and worth pursuing. /12

1.2 Lord Farquaad wants to know which of the two opportunities will he get his money back over the shortest time.