PC-2A Bruce is considering the purchase of a restaurant named Hard Rock Hollywoo

Question

PC-2A Bruce is considering the purchase of a restaurant named Hard Rock Hollywood. The restaurant is listed for sale at $1,100,000. With the help of his accountant, Bruce projects the net cash flows (cash inflows less cash outflows) from the restaurant to be the following amounts over the next 10 years: Bruce expects to sell the restaurant after 10 years for an estimated $1,200,000. years Amount 1-6 90000(each year) 7 100000 8 110000 9 120000 10 130000 Required: If Bruce wants to make at least 12% annually on his investment, should he purchase the restaurant? (Assume all cash flows occur at the end of each year.)

Explanation / Answer

Present value of cash flows = 90000/1.12 + 90000/1.12^2 + 90000/1.12^3 + 90000/1.12^4 + 90000/1.12^5 + 90000/1.12^6 + 100000/1.12^7 + 110000/1.12^8 + 120000/1.12^9 + 130000/1.12^10 +1,200,000/1.12^10 =$ 931,186.34 The present value of cash flows is less than the sale price. Hence he should not purchase the restaurant

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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