Determine the present value, assuming that John desires a 10% rate of return on this investment. (Assume that all cash flows occur at the end of the year.) **John Wiggins Restaurant Purchase Analysis**John Wiggins is evaluating the purchase of a small restaurant. The seller's asking price is $1,000,000. Based on past financial information, John estimated the following future net cash flows (cash inflows minus outflows) from the restaurant:- **Years 1-6:** $100,000 per year- **Year 7:** $90,000- **Year 8:** $80,000- **Year 9:** $70,000- **Year 10:** $60,000If purchased, John plans to hold the restaurant for 10 years and then sell it for an estimated $900,000.**Objective:**The task is to calculate the present value of these cash flows, using a 10% desired rate of return. The assumption is that all cash flows occur at the end of each year.**Cash Flow Calculation Table:**1. **Future Amount:** Annual or terminal cash flow values.2. **i (Interest Rate):** 10% for each cash flow.3. **n (Years):** Corresponds to specific years for each cash inflow.4. **Present Value Calculation:** Use financial tables or formulas to calculate the present value for each cash amount based on the 10% interest rate.**Should the Restaurant be Purchased?**The decision depends on whether the total present value of cash flows equals or exceeds the asking price of $1,000,000. Fill in each present value calculation, sum them, and compare to the purchase price. The table currently shows a total present value of $0, indicating calculations need completion.

Solution : Future Amount i= n= PV Factor Present Value $100,000.00 10% 1-6 4.355261 $435,526…

Answered: Determine the present value, assuming…

Determine the present value, assuming that John desires a 10% rate of return on this investment. (Assume that all cash flows occur at the end of the year.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Determine the present value, assuming that John desires a 10% rate of return on this investment. (Assume that all cash flows occur at the end of the year.)

**John Wiggins Restaurant Purchase Analysis**

John Wiggins is evaluating the purchase of a small restaurant. The seller's asking price is $1,000,000. Based on past financial information, John estimated the following future net cash flows (cash inflows minus outflows) from the restaurant:

- **Years 1-6:** $100,000 per year
- **Year 7:** $90,000
- **Year 8:** $80,000
- **Year 9:** $70,000
- **Year 10:** $60,000

If purchased, John plans to hold the restaurant for 10 years and then sell it for an estimated $900,000.

**Objective:**
The task is to calculate the present value of these cash flows, using a 10% desired rate of return. The assumption is that all cash flows occur at the end of each year.

**Cash Flow Calculation Table:**

1. **Future Amount:** Annual or terminal cash flow values.
2. **i (Interest Rate):** 10% for each cash flow.
3. **n (Years):** Corresponds to specific years for each cash inflow.
4. **Present Value Calculation:** Use financial tables or formulas to calculate the present value for each cash amount based on the 10% interest rate.

**Should the Restaurant be Purchased?**
The decision depends on whether the total present value of cash flows equals or exceeds the asking price of $1,000,000. Fill in each present value calculation, sum them, and compare to the purchase price. The table currently shows a total present value of $0, indicating calculations need completion.

Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).

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