John and Sally Claussen are contemplating the purchase of a hardware store from
ID: 2489666 • Letter: J
Question
John and Sally Claussen are contemplating the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $79,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $490,000. 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: 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.) (Use PV of $1 and PVA of $1) (Round "PV Factors" to 5 decimal places, intermediate and final answer to the nearest dollar amount.)
Explanation / Answer
Year
Amount
Discount factor
PV
1-5 (8%)
79,000
3.99271
3.99271
315,424
6-10(10%)
79,000
(6.14457-3.79079)
2.35378
185,949
11-20 (12%)
79,000
(7.46944-5.65022)
1.81923
143,719
20 (12%)
490,000
.10367
.10367
50,799
695,891
please ignore the above part , thats wrong i am adding the correct answer below
Back to year 10
PV9FV=490,000 PMT=79,000 , N=10 I=12%)
490,000* .32197 = 157,765
79,000 * 5.65022 = 446,367
=604,132
Back to year 5
PV(FV = 604,132 PMT =79,000 N=5 I=10%)
604,142 * .62092 = 375,118
79,000 * 3.79079 = 299,472
$674,590
Back to present
PV (FV = 674,590 PMT= 79,000 N=5 I=8%)
674,590 * .68058 = 459,112
79,000 * 3.99271 = 315,424
=774,536
$774,536 answer
Year
Amount
Discount factor
PV
1-5 (8%)
79,000
3.99271
3.99271
315,424
6-10(10%)
79,000
(6.14457-3.79079)
2.35378
185,949
11-20 (12%)
79,000
(7.46944-5.65022)
1.81923
143,719
20 (12%)
490,000
.10367
.10367
50,799
695,891
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