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John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the...

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

year amount
1-6 92000
7 82000
8 72000
9 62000
10 52000

If purchased, the restaurant would be held for 10 years and then sold for an estimated $820,000.

equired:
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.)

future amount i n present value
92000 10% ? ?
82000 10% ? ?
72000 10% ? ?
62000 10% ? ?
52000 10% ? ?
820000 10% ? ?

Should they purchase it?

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Answer #1

YEAR CASH INFLOWS PV FACTOR Present value of cash infows

1 92000 .909 83628

2 92000 .826 75992

3    92000 .751 69092

4 92000 .683 62836

5 92000 .621 57132

6    92000 .564 51888

7    82000 .513 42066

8    72000 .467 33624

9 62000 .424 26288

10 52000 .386 20072

820000 386 316520

839138

Net Present value = Present value of cash inflows - Present value of cash outflows

= 839138 - 920000

= -80868

as the Net Present value of this project is negative John Wiggins should not purchase the restaurant

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