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:
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.
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.)