Question

John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The...

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 $89,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $590,000. 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 1–5 8 % Years 6–10 10 % Years 11–20 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.) Next Visit question mapQuestion 7 of 8 Total 7 of 8 Prev

Homework Answers

Answer #1
Statement Showing Estimated Cash Flows
Yearly Time Interest
Cash Flow(A) Period Rate PVF(B) PV(A*B)
Years 1-5 $89,000 1-5 8%               3.993 $355,351
Years 6-10 $89,000 6-10 10%               2.354 $209,486
Years 11-20 $89,000 11-20 12%               1.819 $161,911
End of Year 20 $590,000 20               0.149 $87,698
Maximum Purchase Price $814446
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The...
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 $89,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $590,000. 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...
John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the...
John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $840,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restaurant would be 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 Amount 1-6 $ 84,000 7 74,000 8 64,000...
6. John Wiggins is considering the purchase of a small restaurant. The purchase price listed by...
6. John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $940,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restaurant would be 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 Amount 1-6 $ 94,000 7 84,000 8...
Baird Bros. Construction is considering the purchase of a machine at a cost of $139,000. The...
Baird Bros. Construction is considering the purchase of a machine at a cost of $139,000. The machine is expected to generate cash flows of $30,000 per year for 10 years and can be sold at the end of 10 years for $20,000. Interest is at 12%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. (FV of...
DON Corp. is contemplating the purchase of a machine that will produce cash savings of $27,000...
DON Corp. is contemplating the purchase of a machine that will produce cash savings of $27,000 per year for five years. At the end of five years, the machine can be sold to realize cash flows of $5,700. Interest is 12%. Assume the cash flows occur at the end of each year. (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.) Required: Calculate...
John Wiggins is contemplating the purchase of a small restaurant. The purchase price listed by the...
John Wiggins is contemplating the purchase of a small restaurant. The purchase price listed by the seller is $970,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restaurant would be as follows: Year 1-6 $97,000 Year 7 $87,000 Year 8 $77,000 Year 9 $67,000 Year 10 $57,000 If purchased, the restaurant would be held for 10 years and then sold for an estimated $870,000. Required: Determine the...
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured...
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2018. International Machines manufactured the equipment at a cost of $89,000. Manufacturers Southern's fiscal year ends December 31. (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.) Related Information: Lease term 2 years (8 quarterly periods) Quarterly rental payments $16,000 at the beginning of each period Economic life of asset 2...
On January 1, 2021, Rick’s Pawn Shop leased a truck from Corey Motors for a five-year...
On January 1, 2021, Rick’s Pawn Shop leased a truck from Corey Motors for a five-year period with an option to extend the lease for three years. Rick’s had no significant economic incentive as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments are $20,000 due on December 31 of each year, calculated by the lessor using a 7% interest rate. The agreement is considered an operating lease. (FV of $1, PV of $1,...
Grichuk Power leased high-tech electronic equipment from Kolten Leasing on January 1, 2018. Kolten purchased the...
Grichuk Power leased high-tech electronic equipment from Kolten Leasing on January 1, 2018. Kolten purchased the equipment from Wong Machines at a cost of $250,000, its fair value. (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.) Related Information: Lease term 2 years (8 quarterly periods) Quarterly lease payments $15,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and...
Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two...
Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: (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.) Machine A could be purchased for $35,750. It will last 10 years with annual maintenance costs of $1,300 per year....