Question

John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $890,000. 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 $ 89,000
7 79,000
8 69,000
9 59,000
10 49,000
If purchased, the restaurant would be held for 10 years and then sold for an estimated $790,000.
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 1

Answer and Explanation:

The computation of the present value is as follows:

Years Value Factor at 11% Present value

1-6 $89,000 4.2305 $376,515

7 $79,000 0.4817 $38,054

8 $69,000 0.4339 $29,939

9 $59,000 0.3909 $23,063

10 $49,000 0.3522 $17,258

10 $790,000 0.3522 $278,238

Present value $763,067

it should be rejected as it less than the initial investment