Question

6. John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $940,000. 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		$	94,000
7			84,000
8			74,000
9			64,000
10			54,000

If purchased, the restaurant would be held for 10 years and then sold for an estimated $840,000.

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.)
  

Answer 1

Solution:

Computation of NPV - John Wiggins
Particulars	Period	Amount	PV Factor	Present Value
Cash Outflows:
Purchase price	0	$940,000	1	$940,000
Present value of cash outflows (A)				$940,000
Cash Inflows:
Year 1-6	1-6	$94,000	4.35526	$409,394
Year 7	7	$84,000	0.51316	$43,105
Year 8	8	$74,000	0.46651	$34,522
Year 9	9	$64,000	0.42410	$27,142
Year 10	10	$54,000	0.38554	$20,819
Sale value of restaurant	10	$840,000	0.38554	$323,854
Present value of cash Inflows (B)				$858,837
NPV (B-A)				-$81,163