Question

Darling Hair Design Studios would like to purchase another hair salon that is being sold in a neighboing town for $510,000. Assume cash flows occur at the end of the year. Based on past volume of sales, Darling estimates the net cash flows that would be generated by the salon:

Years	Cash Flows
1-3	$63,000
4	65,000
5	83,000
6	63,000

After six years, Darling can sell the hair salon for $260,000.

If the interest rate on this investment is 6%, compounded annually, should Darling purchase the salon.

A. Calculate the present value of the cash inflows from the new salon.

Answer 1

Calculate net present value :

Net present value = Present value of cash inflow-Present value of cash outflow

Year	Cash flow	PVF @ 6%	Present value
1-3	63000	2.67301	168399.63
4	65000	0.79209	51485.85
5	83000	0.74726	62022.58
6	63000	0.70496	44412.48
After six years	260000	0.70496	183289.60
Total present value of cash inflow			509610.14
Present value of cash outflow			510000
Net present value			-389.86

No darling should not purchase the salon