4
The Claussens are considering the purchase of a hardware store. The Claussens anticipate that the store will generate cash flows of
$86,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $560,000. 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:
1.28
points
Years 1-5
Years 6-10
Years 11-20
8%
10%
12%
eBook
Required:
References
What is the maximum amount the Claussens should pay for the hardware store? (Assume that all cash flows occur at the end of the
year.)
Note: Do not round intermediate calculations. Round your final answers to nearest whole dollar amount. Use tables, Excel, or a
financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
PV of $86.000 cash
flow
PV of $560,000
selling price
Maximum paid for
store
Years 1-5
$
Years 6-10
343,373
202,425
Years 11-20
Year 20
Total
$
545,798 +
$
545,798
