Problem 5-5 (Algo) Investment decision; varying rates [LO5-3, 5-8]

John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $78,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $480,000. 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: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Years 15	7	%
Years 610	10	%
Years 1120	12	%

Required: What is the maximum amount the Claussens should pay John Duggan for the hardware store? (Assume that all cash flows occur at the end of the year.) (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.)

Problem 5-5 (Algo) Investment decision; varying rates (LO5-3, 5-8] John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $78,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $480,000. 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: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Years 1- 7% 5 Years 6- 10% 10 Years 12% 11-20 Required: What is the maximum amount the Claussens should pay John Duggan for the hardware store? (Assume that all cash flows occur at the end of the year.) (Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) PV of $78,000 cash flow Answer is not complete. PV of Maximum $480,000 selling paid for store price $ 319,816 Years 1- 5 Years 6- 10 Years 11-20 Year 20 Total IS 319.816 + = $ 319.816