Question

c John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $880,000. 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. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $.1) (Use appropriate factor(s) from the tables provided.) Years 1.6 7 8 9 10 Amount $88,000 78,000 68,000 58.000 48,000 If purchased the restaurant would be held for 10 years and then sold for an estimated $780,000 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 Present Value Future Amount $ 88.000 78 000 68.000 58,000 48.000 780.000 10% 10% 10% 109 10% 10 De

Answer 1

Answer)

Calculation of Net Present Value

Net Present Value = Present Value of Cash Inflows – Present Value of Cash outflows

                                   = $ 798,836.08 - $ 880,000

                                   = - $ 81,163.92 or - $ 81,164 (rounded off).

Therefore the net present value of investment is - $ 81,164.

Note: Since the net present value is negative, the investment should not be made.

Working Note:

Calculation of Present value of cash inflows:

Years	Cash Inflows	Present Value factor @ 10%	Present Value (Cash Inflows X Present Value Factor)
1	$         88,000	0.90909	$                  79,999.92
2	$         88,000	0.82645	$                  72,727.60
3	$         88,000	0.75131	$                  66,115.28
4	$         88,000	0.68301	$                  60,104.88
5	$         88,000	0.62092	$                  54,640.96
6	$         88,000	0.56447	$                  49,673.36
7	$         78,000	0.51316	$                  40,026.48
8	$         68,000	0.46651	$                  31,722.68
9	$         58,000	0.42410	$                  24,597.80
10	$         48,000	0.38554	$                  18,505.92
10	$     7,80,000	0.38554	$               300,721.20
Present Value of Cash Inflows	$               798,836.08

Therefore present value of cash inflows is $ 798,836.08

Calculation of Present value of cash Outflows:

Since the purchase price of restaurant is to be paid now, the Present Value of Cash Outflows will be equal to its purchase price, i.e. $ 880,000.