John Wiggins is considering the purchase of a small restaurant. The purchase pri

Question

John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $800,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restaurant would be as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

If purchased, the restaurant would be held for 10 years and then sold for an estimated $700,000.

Required:
Determine the present value, assuming that John desires a 10% rate of return on this investment. (Assume that all cash flows occur at the end of the year.) (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.)
  

Years Amount 1-6 $ 80,000 7 70,000 8 60,000 9 50,000 10 40,000

Explanation / Answer

SOLUTION

The restaurant should not be purchased since it is generating a negative cash flow of $81,630

Year Cash flows Present value of $1, i=10% PV of cash flows ($) 1-6 80,000 4.355 348,400 7 70,000 0.513 35,910 8 60,000 0.466 27,960 9 50,000 0.424 21,200 10 40,000 0.385 15,400 10 700,000 0.385 269,500 Present value 718,370 Less: Initial outlay (800,000) Net present value (81,630)

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.