John and Sally Claussen are considering the purchase of a ha

John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $89,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $590,000. The Claussens will finance the investment with a variable rate mortgage. Interest rates will increase twice during the 20-year life of the mortgage. Accordingly, the Claussens’ desired rate of return on this investment varies as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Years 1–5 8 % Years 6–10 10 % Years 11–20 12 % Required: What is the maximum amount the Claussens should pay John Duggan for the hardware store? (Assume that all cash flows occur at the end of the year.) (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) Next Visit question mapQuestion 7 of 8 Total 7 of 8 Prev

Solution

Statement Showing Estimated Cash Flows Yearly Time Interest Cash Flow(A) Period Rate PVF(B) PV(A*B) Years 1-5 $89,000 1-5 8%               3.993 $355,351 Years 6-10 $89,000 6-10 10%               2.354 $209,486 Years 11-20 $89,000 11-20 12%               1.819 $161,911 End of Year 20 $590,000 20               0.149 $87,698 Maximum Purchase Price $814446