Chapter 6, Problem 6.4P

Investment analysis

• LO6–3, LO6–7

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:

Years	Amount
1–6	$80,000
7	70,000
8	60,000
9	50,000
10	40,000

If purchased, the restaurant would be held for 10 years and then sold for an estimated $700,000.

Required:

Assuming that John desires a 10% rate of return on this investment, should the restaurant be purchased? (Assume that all cash flows occur at the end of the year.)