Question

Bruce is considering the purchase of a restaurant named Hard Rock Hollywood. The restaurant is listed for sale at $1,090,000. 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 Amount 1-6 $ 89,000 (each year) 7 99,000 8 109,000 9 119,000 10 129,000 Bruce expects to sell the restaurant after 10 years for an estimated $1,190,000. (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.)

Answer 1

Answer:

$1,048,269.38

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

Cash flow in year 0 = $1-,090,000

Cash flow in year 1 = 89,000

Cash flow in year 2 = 89,000

Cash flow in year 3 = 89,000

Cash flow in year 4 = 89,000

Cash flow in year 5 = 89,000

Cash flow in year 6 = 89,000

Cash flow in year 7 = 99,000

Cash flow in year 8 = 109,000

Cash flow in year 9 = 119,000

Cash flow in year 10 = 129,000 + $1,190,000

I = 10 %

NPV = $1,048,269.38

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute