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 8% 10% Years 6-10 Years 11-20 12%
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 8% 10% Years 6-10 Years 11-20 12%
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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![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. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD 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%2Ffa3f0409-a1d4-4dde-8934-2ca24a0e7bc9%2F485367a8-0ee1-4ad0-8bae-badb24e3776a%2Fnsj0hh5_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
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. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD 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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