John wiggins is considering the purchase of a small restaurant. the purchase price listed by the seller is $800,000. 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:

Question

Kasey Wiley

Business

14 January, 06:48

John wiggins is considering the purchase of a small restaurant. the purchase price listed by the seller is $800,000. 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:

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Fatima Bell · Answer 1

Since NPV is negative (-$73,835.60), the project should be rejected.

Explanation:

Years Amount

0 - $800,000

1-6 $80,000

7 $70,000

8 $60,000

9 $50,000

10 $740,000

In order to determine if this is a good investment or not, we need to calculate the net present value (NPV). If NPV ≥ 0, then the project is good, it NPV is negative, then the project should be rejected.

I will use an excel spreadsheet to calculate the NPV with a 10% discount rate.

We must first determine the present value of the cash flows and then subtract the investment from it.

The present value of the cash flows = $726,164.60 and obviously its smaller than the initial investment: $726,164.60 - $800,000 = - $73,835.60

Since NPV is negative, the project should be rejected.