Question

John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $890,000. 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 Amount $89.000 79,00 69,000 59,000 49.000 10 If purchased, the restaurant would be held for 10 years and then sold for an estimated $790,000. Required: Determine the present value, assuming that John desires an 11% 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 Present Value 11% 11% Future Amount i 89,000 79,000 69,000 59,000 49,000 790,000 11 1191 1151 11% Should the restaurant be purchased?

Answer 1

Correct Answer:

face Amount	i=	n=	present value
$         89,000	4.230538	1 to 6	$ 376,517.87
$         79,000	0.481658	7	$    38,051.01
$         69,000	0.433926	8	$    29,940.93
$         59,000	0.390925	9	$    23,064.56
$         49,000	0.352184	10	$    17,257.04
$       790,000	0.352184	10	$ 278,225.74
			$ 763,057.15
should the Restaurant be purchased			NO.

Since the present value of the restaurant after 10 year is less than the cost of initial investment , therefore the restaurant should not be purchased.

End of answer.

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