Finance and Accounting

Finance and Accounting

Business Adviser

You have recently been appointed as a business adviser with a local Chamber of

Commerce. They provide advice for business start-ups and strategic advice for

existing SME’s.

Recently David Lafferton has approached the Chamber o1’Comrnerce for advice

regarding a possible investment. He has recently been made redundant and has

received £100,000 redundancy payment. His wife Susan has had a small catering

business which undertakes outside catering. mainly for weddings, funeral teas and

children’s parties. Currently this is all done from the large kitchen in their house.

If David were to use all or part of his redundancy money then Susan’s business could

expand and have permanent dedicated premises with a small cafe. There are two

possible investment opportunities open to them. The first is the old vicarage on the

main street of their local village and would require an investment of £200,000, which

is all of the money. The second option is the Olde Forge Tearoom which would

require an investment of £120,000 but has less capacity than the first project.

After extensive research the projected cash flows are estimated follows. It may be

assumed that the cash flows arise evenly throughout the year.

Year Vicarage Olde Forge

1 15,000 12,000

2 45,000 32,000

3 60.000 45.000

4 65.000 48,000

5 71.000 51,000

David and Susan agree that they need a minimum 12% return on their investment if it

is to be worthwhile.


Your task as a Business Advisor is to produce an informal report for David and Susan

which gives a full Capital Investment Appraisal of both investment opportunities.

This report should be as detailed as possible and conclude with recommendation(s)

and reasons.

Your report should contain the following:

0 The purpose and value of Capital Investment Appraisals

0 Calculations using both non-discounting and discounting methods of 1

investment appraisal.

Comment on the limitations and advantages of the techniques used.

Of the techniques you have used state which two in your opinion are of most


Recommend which project is the better option. stating why it is superior to the

other option.

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