ces 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 $77,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $470,000. 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: 7% 9% 11% 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 $77,000 cash flow + PV of $470,000 selling price = Maximum paid for store Years 1-5 $ 315,715 Years 6-10 Years 11-20 Year 20 Total $ 315,715 + = $ 315,715
ces 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 $77,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $470,000. 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: 7% 9% 11% 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 $77,000 cash flow + PV of $470,000 selling price = Maximum paid for store Years 1-5 $ 315,715 Years 6-10 Years 11-20 Year 20 Total $ 315,715 + = $ 315,715
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
None
![ces
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
$77,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $470,000. 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:
7%
9%
11%
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 $77,000 cash
flow
+
PV of $470,000
selling price
=
Maximum paid for
store
Years 1-5
$
315,715
Years 6-10
Years 11-20
Year 20
Total
$
315,715 +
= $
315,715](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa01a145c-49f9-4ef2-8950-2eff328282cc%2F30307d3c-f542-48d0-bf36-62eef38c27ed%2Fgf2h2bg_processed.jpeg&w=3840&q=75)
Transcribed Image Text:ces
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
$77,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $470,000. 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:
7%
9%
11%
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 $77,000 cash
flow
+
PV of $470,000
selling price
=
Maximum paid for
store
Years 1-5
$
315,715
Years 6-10
Years 11-20
Year 20
Total
$
315,715 +
= $
315,715
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education