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 |

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.)
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1-6
$
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7
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Brief Exercise 14-4 Determining the price of bonds [LO14-2]
A company issued 8%, 10-year bonds with a face amount of $100
million. The market yield for bonds of similar risk and maturity is
6%. Interest is paid semiannually. At what price did the bonds
sell? (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. Enter your answers in whole
dollars.)

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