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 $1,000,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash ouflows) generated by the restaurant would be as follows: (FV of $1, PV of $1 FVA of $1, PVA of S1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided) 1-6 $100,000 7 90,000 8 80,000 9 70,000 10 60,000 If purchased, the restaurant would be held for 10 years and then sold for an estimated $900,000. 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 doliar amount.) 100,000 90,000 80,000 70,000| 60,000| 900,000 10% 10% 10% 10% 10% 10% Should the restaurant be purchased? Rrev 1 of 7 Next >

Explanation / Answer

Calculation of present value of cash inflows

Net present value = Present value of cash inflows - Present value of cash outflows

= 919,270 - 1,000,000

= -$80,730

Since, net present value is negative, hence the hotel should not be purchased.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks

Year Cash inflow (i) PVF (ii) Present value of cash inflows (i) x (ii) 1-6 100,000 4.355 435,500 7 90,000 0.513 46,170 8 80,000 0.467 37,360 9 70,000 0.424 29,680 10 60,000 0.386 23,160 10 900,000 0.386 347,400 $919,270

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