Mark and Paul are university students studying marketing. They have been presented with two investment opportunities.
Investment One
The first opportunity is to invest in a new restaurant. If the investment is found to be worthwhile, they intend on having their opening night on 3 August, 2018.
Restaurant Purchases and Expenses
The investment requires the purchase of the following assets to begin trading:
- Machinery/Equipment $110,000
- Furniture (tables and chairs) $30,000
| • | Vehicle (deliveries) | $43,000 |
| • | Utensils (cups, plates) | $18,000 |
| • | Produce (for 1 week) | $10,000 |
| • | Drinks (for 1 month) | $20,000 |
The non-current assets would need to be purchased on 1 June to allow Mark and Paul to set up the restaurant in time for the big opening. As of 1 June, Mark and Paul will have $80,000 in their bank account.
Mark and Paul will be obtaining their produce and drinks from suppliers who allow them to purchase on credit. Based on their anticipated sales, they will be required to purchase $10,000 of produce for 1 weeks’ worth of trading which will commence on 1 August and will continue each week. They will be required to repay this by the end of August.
They will also be purchasing 1 months’ worth of drinks for $20,000 which will commence at the beginning of July and will continue each month. They will be required to repay their drink supply account off within 90 days of every purchase. They forecast that they will pay off 10% in the current month of purchase, 45% off 60 days after purchase and 45% off 90 days after purchase. For their first drink purchase, for example, they will repay 10% of the account off in July, 45% off in August and 45% off in September.
Mark and Paul will be managing the restaurant themselves and will be hiring 3 casual staff who will work 6 hours a day, 6 days a week at $23.00 an hour. Mark and Paul will be withdrawing $10,000 each per month from the businesses bank account as owner drawings.
It is anticipated that the total overhead costs per month (beginning in June) will be $5,000.
Restaurant Sales
Mark and Paul believe, on average, that they will be able to sell 20,000 meals in the first month of trade, 18,000 in the second month, 18,000 in the third month and 22,000 in the fourth month at an average sale price of $45.00. They forecast that drink sales will be triple the amount of meals per month and will be at an average sale price of $6.00.
Investment One Requirements
- Identify and explain the nature and scope of investments to Mark and Paul.
- Using the information presented above, prepare the following budgets for June, July, August and September:
- Sales budget
- Cash budget
- Labour budget
(Assume there are 4 weeks per month)
- In your own words, critically analyse the three budgets and the forecasted information that Mark and Paul have provided. Provide a discussion on what each of these budgets say about their new potential investment (Hint: chapter 9)
- What practical issues should Mark and Paul consider when making their decision to invest in the restaurant? (Hint: chapter 12).
Investment Two
The second opportunity is to invest their funds in a new business development on the Gold Coast with other venture-capital investors. The investment requires $390,000 from Mark and Paul. The investment promises net cash inflows over the four years of the investment of $100,000, $230,000, $190,000 and $140,000 respectively. The cost of the funds is 12 per cent.
Investment Two Requirements
- Calculate the net present value, accounting rate of return and payback period (show all workings) and identify what they say about this investment (Hint: Chapter 12).
- Compare and contrast the two investments. Which investment would be best for Mark and Paul? (Hint: Are the investments comparable? Do they have enough funds? Are the identified nature and scope of investments and the practical issues associated with the investments going to be an issue for Paul and Mark? Are these investments suitable for Mark and Paul’s needs? Do Mark and Paul have enough skills and time?).Assessment Task Information
Mark and Paul are university students studying marketing. They have been presented with two investment opportunities.
Investment One
The first opportunity is to invest in a new restaurant. If the investment is found to be worthwhile, they intend on having their opening night on 3 August, 2018.
Restaurant Purchases and Expenses
The investment requires the purchase of the following assets to begin trading:
- Machinery/Equipment $110,000
- Furniture (tables and chairs) $30,000
| • | Vehicle (deliveries) | $43,000 |
| • | Utensils (cups, plates) | $18,000 |
| • | Produce (for 1 week) | $10,000 |
| • | Drinks (for 1 month) | $20,000 |
The non-current assets would need to be purchased on 1 June to allow Mark and Paul to set up the restaurant in time for the big opening. As of 1 June, Mark and Paul will have $80,000 in their bank account.
Mark and Paul will be obtaining their produce and drinks from suppliers who allow them to purchase on credit. Based on their anticipated sales, they will be required to purchase $10,000 of produce for 1 weeks’ worth of trading which will commence on 1 August and will continue each week. They will be required to repay this by the end of August.
They will also be purchasing 1 months’ worth of drinks for $20,000 which will commence at the beginning of July and will continue each month. They will be required to repay their drink supply account off within 90 days of every purchase. They forecast that they will pay off 10% in the current month of purchase, 45% off 60 days after purchase and 45% off 90 days after purchase. For their first drink purchase, for example, they will repay 10% of the account off in July, 45% off in August and 45% off in September.
Mark and Paul will be managing the restaurant themselves and will be hiring 3 casual staff who will work 6 hours a day, 6 days a week at $23.00 an hour. Mark and Paul will be withdrawing $10,000 each per month from the businesses bank account as owner drawings.
It is anticipated that the total overhead costs per month (beginning in June) will be $5,000.
Restaurant Sales
Mark and Paul believe, on average, that they will be able to sell 20,000 meals in the first month of trade, 18,000 in the second month, 18,000 in the third month and 22,000 in the fourth month at an average sale price of $45.00. They forecast that drink sales will be triple the amount of meals per month and will be at an average sale price of $6.00.
Investment One Requirements
- Identify and explain the nature and scope of investments to Mark and Paul.
- Using the information presented above, prepare the following budgets for June, July, August and September:
- Sales budget
- Cash budget
- Labour budget
(Assume there are 4 weeks per month)
- In your own words, critically analyse the three budgets and the forecasted information that Mark and Paul have provided. Provide a discussion on what each of these budgets say about their new potential investment (Hint: chapter 9)
- What practical issues should Mark and Paul consider when making their decision to invest in the restaurant? (Hint: chapter 12).
Investment Two
The second opportunity is to invest their funds in a new business development on the Gold Coast with other venture-capital investors. The investment requires $390,000 from Mark and Paul. The investment promises net cash inflows over the four years of the investment of $100,000, $230,000, $190,000 and $140,000 respectively. The cost of the funds is 12 per cent.
Investment Two Requirements
- Calculate the net present value, accounting rate of return and payback period (show all workings) and identify what they say about this investment (Hint: Chapter 12).
- Compare and contrast the two investments. Which investment would be best for Mark and Paul? (Hint: Are the investments comparable? Do they have enough funds? Are the identified nature and scope of investments and the practical issues associated with the investments going to be an issue for Paul and Mark? Are these investments suitable for Mark and Paul’s needs? Do Mark and Paul have enough skills and time?).
