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c John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $880,000. John h
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Answer #1

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.

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