Question

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

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.)

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

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