Question

Bruce is considering the purchase of a restaurant named Hard Rock Hollywood. The restaurant is listed for sale at $1,180,000. With the help of his accountant, Bruce projects the net cash flows (cash inflows less cash outflows) from the restaurant to be the following amounts over the next 10 years: Years 1-6 7 Amount $ 98,000 (each year) 108,000 118,000 128,000 138,000 10 Bruce expects to sell the restaurant after 10 years for an estimated $1,280,000. (FV of $1. PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to 2 decimal places.) Required: 1-a. Calculate the total present value of the net cash flows if Bruce wants to make at least 10% annually on his investment. (Assume all cash flows occur at the end of each year.) Total present value 1-b. Should he purchase the restaurant? Ο Νο Yes

Answer 1

cash outflow Year Cash outflow 1180,000 PV 1180,000 ... Porcent Value of cashoutflow 1180.000 $ Cash Inflows Cash inflow Pooluint Value year 1-6- 98000 TO 8000 118,000 128,DOD 138,00D 1299,000 Discounting factor @ 10.1. 4.3552 0.5132 0.4665 0.4241 426 $15.55 554 21.08 55047.97 54284.5 53204.997 493495.41 1138269.38 10 0.3855 NPVie PV Cash Inflow - PV of cash Outflow - 1138269 – 1180,000 = (41731) (6) since - not the to NPV is purchase negative, the pars it is adviced restaurant. * NOTE: Initial cash outflow - the year. occurs at the begin of