P 6-4 John Wiggins is contemplating 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:

John Wiggins is contemplating the purchase of a small restaurant. The purchase price listed by the seller

ANSWER KEY P 6-4 Investment analysis

P 6-4  John Wiggins is contemplating 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.)

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