es 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 Years 6-10 $ 315,715 Years 11-20 Year 20 Total $ 315,715 + = EA $ 315,715
es 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 Years 6-10 $ 315,715 Years 11-20 Year 20 Total $ 315,715 + = EA $ 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
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pm.3
![es
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
Years 6-10
$
315,715
Years 11-20
Year 20
Total
$
315,715 +
=
EA
$
315,715](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8d1c64d7-05d8-4585-8e2f-af54b3a6b0d7%2F380ae2a8-d88b-4d52-acba-0533c1d65df9%2Fk9dyuml_processed.jpeg&w=3840&q=75)
Transcribed Image Text:es
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
Years 6-10
$
315,715
Years 11-20
Year 20
Total
$
315,715 +
=
EA
$
315,715
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