Answer)
Calculation of Net Present Value
Net Present Value = Present Value of Cash Inflows – Present Value of Cash outflows
= $ 798,836.08 - $ 880,000
= - $ 81,163.92 or - $ 81,164 (rounded off).
Therefore the net present value of investment is - $ 81,164.
Note: Since the net present value is negative, the investment should not be made.
Working Note:
Calculation of Present value of cash inflows:
Years |
Cash Inflows |
Present Value factor @ 10% |
Present Value (Cash Inflows X Present Value Factor) |
1 |
$ 88,000 |
0.90909 |
$ 79,999.92 |
2 |
$ 88,000 |
0.82645 |
$ 72,727.60 |
3 |
$ 88,000 |
0.75131 |
$ 66,115.28 |
4 |
$ 88,000 |
0.68301 |
$ 60,104.88 |
5 |
$ 88,000 |
0.62092 |
$ 54,640.96 |
6 |
$ 88,000 |
0.56447 |
$ 49,673.36 |
7 |
$ 78,000 |
0.51316 |
$ 40,026.48 |
8 |
$ 68,000 |
0.46651 |
$ 31,722.68 |
9 |
$ 58,000 |
0.42410 |
$ 24,597.80 |
10 |
$ 48,000 |
0.38554 |
$ 18,505.92 |
10 |
$ 7,80,000 |
0.38554 |
$ 300,721.20 |
Present Value of Cash Inflows |
$ 798,836.08 |
Therefore present value of cash inflows is $ 798,836.08
Calculation of Present value of cash Outflows:
Since the purchase price of restaurant is to be paid now, the Present Value of Cash Outflows will be equal to its purchase price, i.e. $ 880,000.
c John Wiggins is considering the purchase of a small restaurant. The purchase price listed by...
John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $920,000. 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 $ 92,000 7 82,000 8 72,000...
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