Question

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 $73,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $430,000. 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 7 %
Years 6–10 9 %
Years 11–20 11 %


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.)
  TABLE 1 Future Value of $1 FV = $1(1 + i) mi 1.0% 1.5% 1 1.01000 1.01500 2 1.02010 1.03022 3 1.03030 1.04568 4 1.04060 1.061TABLE 2 Present Value of $1 $1 PV (1+i) W 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 7.0% 3.0% 0.0% 0.0% 11.0% 1TABLE 3 Future Value of an ordinary Annuity of $1 FVA = (1 + i) - 1 w 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%TABLE 4 Present Value of an ordinary Annuity of $1 PVA = 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 7.0% 8.0% 0.0TABLE 5 Future Value of an Annuity Due of $1 FVAD = |(1+i) – 1 X (1+i). i wi 1 2 3 20.0% 1.2000 2.6400 1.0% 1.0100 2.0301 3.TABLE 6 Present Value of an Annuity Due of $1 (1 - 1+ PVAD = (1+) wi 1 2 3 4 1.0% 1.00000 1.99010 2.97040 3.94099 .5% 1.00000PV of $73,000 cash flow PV of $430,000 selling price Maximum paid for store Years 1-5 Years 6-10 Years 11-20 Year 20 Total

0 0
Add a comment Improve this question Transcribed image text
Answer #1
Year PV of $73,000 cash flow PV of $430,000 selling price Maximum paid for store
1-5 $299,315 $299,315
6-10 $184,545 $184,545
11-20 $151,407 $151,407
20 $89,870 $89,870
Total $635,267 $89,870 $725,137

Maximum amount that should be paid for the store is $725,137.

Add a comment
Know the answer?
Add Answer to:
John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT