## Question

###### Check my work View previa John Wiggins is considering the purchase of a small restaurant. The...

Check my work View previa John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $920,000. 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.) Years 1-6 7 8 9 10 Amount $92,000 82,000 72,000 62,000 52,000 If purchased, the restaurant would be held for 10 years and then sold for an estimated $820,000. 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.) n= Future Amount 92,000 82,000 72,000 62,000 52,000 820,000 Present Value 6 1 $ 42,066 81 10% 10% 10% 10% 10% 10% 9 10 10 42,066 $ No Should the restaurant be purchased?

## Answers

Answer-

Calculation of Investment's Net Present Value Net Cash Flows $ (a) Present Value of 1 at 10% (b) Present Value of cash flows (c=a*b) $ Year 1 to Year 6 92000 4.355 400660 Year 7 82000 0.513 42066 Year 8 72000 0.467 33624 Year 9 62000 0.424 26288 Year 10 52000 0.386 20072 Year 10 820000 0.386 316520 Totals Total present value of cash inflow (a) 839230 Total cash outflow (b) 920000 Net Present Value $ (c=a-b) -80770 The restaurant should not be purchased due to negative present value.

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