John and Sally Claussen are contemplating the purchase of a hardware store from
ID: 2660244 • 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 $72,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $420,000. 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
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 $72,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $420,000. 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
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 $72,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $420,000. 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: 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
maximum amount the Claussens should pay = Present value of future cashflows
= 72000/1.08 + 72000/1.08^2 + 72000/1.08^3 + 72000/1.08^4 + 72000/1.08^5 +72000/1.1^6+ 72000/1.1^7 + 72000/1.1^8 + 72000/1.1^9 + 72000/1.1^10 + 72000/1.12^11 + 72000/1.122^12 + 72000/1.12^13...... 72000/1.12^20+ 420,000/1.12^20
=$652,414
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.