Problem 5-5 (Algo) Investment decision; varying rates [LO5-3, 5-8] 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: Years 1-5 Years 6-10 Years 11-20 Required: 8% 10% 12% 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 = Years 1-5 Years 6-10 Years 11-20 Year 20 Total $ Maximum paid for store $ 0
Problem 5-5 (Algo) Investment decision; varying rates [LO5-3, 5-8] 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: Years 1-5 Years 6-10 Years 11-20 Required: 8% 10% 12% 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 = Years 1-5 Years 6-10 Years 11-20 Year 20 Total $ Maximum paid for store $ 0
Chapter7: Types And Costs Of Financial Capital
Section: Chapter Questions
Problem 7EP
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![Problem 5-5 (Algo) Investment decision; varying rates [LO5-3, 5-8]
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:
Years 1-5
Years 6-10
Years 11-20
8%
10%
12%
Required:
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)
Years 1-5
Years 6-10
Years 11-20
Year 20
Total
PV of $86,000 cash
flow
PV of $560,000
selling price
Maximum paid for
store
$
0
+
=
$
0](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2e7e5472-6f40-4610-8c84-c5d3bfa7d8c7%2F3b8c07d4-60f5-4772-b47c-5debc4f24562%2Fjqopy1_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 5-5 (Algo) Investment decision; varying rates [LO5-3, 5-8]
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:
Years 1-5
Years 6-10
Years 11-20
8%
10%
12%
Required:
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)
Years 1-5
Years 6-10
Years 11-20
Year 20
Total
PV of $86,000 cash
flow
PV of $560,000
selling price
Maximum paid for
store
$
0
+
=
$
0
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