Hi! My classmates and I are stumped, please help us solve this question! Bruce i

Question

Hi! My classmates and I are stumped, please help us solve this question!

Bruce is considering the purchase of a restaurant named Hard Rock Hollywood. The restaurant is listed for sale at $1,000,000. 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 $1,300,000.

Calculate the total present value of the net cash flows if Bruce wants to make at least 11% annually on his investment. (Assume all cash flows occur at the end of each year.)

Years Amount 1-6     $100,000   (each year) 7     110,000   8     120,000   9     130,000   10     140,000  

Explanation / Answer

Present value of cash flows = 100000/1.11 + 100000/1.11^2 + 100000/1.11^3 + 100000/1.11^4 + 100000/1.11^5 + 100000/1.11^6 + 110000/1.11^7 + 120000/1.11^8 + 130000/1.11^9 + 140000/1.11^10 +1,300,000/1.11^10 =$1,086,073.25

The present value of cash flows is less than the sale price. Hence he should not purchase the restaurant   

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