John Wiggins is considering the purchase of a small restaurant.
The purchase price listed by the seller is $840,000. 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 | $ | 84,000 | ||
| 7 | 74,000 | |||
| 8 | 64,000 | |||
| 9 | 54,000 | |||
| 10 | 44,000 | |||
If purchased, the restaurant would be held for 10 years and then
sold for an estimated $740,000.
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.)
Answer-The present value, assuming that John desires an 11% rate of return on this investment= $-123989.
Explanation-
| Calculation of Investment's Net Present Value | |||
| Net Cash Flows $ (a) | Present Value of 1 at 11% (b) | Present Value of cash flows (c=a*b) $ | |
| Year 1 to Year 6 | 84000 | 4.2305 | 355362 |
| Year 7 | 74000 | 0.4817 | 35646 |
| Year 8 | 64000 | 0.4339 | 27770 |
| Year 9 | 54000 | 0.3909 | 21109 |
| Year 10 | 44000 | 0.3522 | 15497 |
| Year 10 | 740000 | 0.3522 | 260628 |
| Totals | |||
| Total present value of cash inflow (a) | 716011 | ||
| Total cash outflow (b) | 840000 | ||
| Net Present Value $ (c=a-b) | -123989 |
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