Question

John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $820,000. 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 1-6 7 8 Amount $82,000 72,000 62,000 52,000 42,000 10 If purchased, the restaurant would be held for 10 years and then sold for an estimated $720,000. 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.) Present Value 10% 10% Future Amount 82,000 72,000 62,000 52,000 42,000 720,000 10% 10% 10% 10% Should the restaurant be purchased?

Answer 1

	Future amount	i =	n =	Present Value
1 - 6	82000	10%	6	$     3,57,131
7	72000	10%	7	$         36,948
8	62000	10%	8	$         28,924
9	52000	10%	9	$         22,053
10	42000	10%	10	$         16,193
10	720000	10%	10	$     2,77,589
				$     7,38,837
	Should the restaurant be purchased			No
	(As the Initial cash outflow is more than inflow)