Question

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 Amount 1-6 $ 92,000 7 82,000 8 72,000 9 62,000 10 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.)

Future Amount i = n = Present Value

$92,000 10%

82,000 10% $42,066

72,000 10%

62,000 10%

52,000 10%

820,000 10%

Should the restaurant be purchased? No

Answer 1

Year	Cash Inflow	Present value factor	Present value of cash inflow
1	92,000	0.90909	83636.28
2	92,000	0.82645	76033.4
3	92,000	0.75131	69120.52
4	92,000	0.68301	62836.92
5	92,000	0.62092	57124.64
6	92,000	0.56447	51931.24
7	82,000	0.51316	42079.12
8	72,000	0.46651	33588.72
9	62,000	0.42410	26294.2
10	52,000	0.38554	20048.08
10	820,000	0.35049	287401.8
			$ 810,095

Net present value = Present value of cash inflow - Initial investment

= 810,095-920,000

= - $109,905

Investment should not be made since net present value is negative.

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