# John and Sally Claussen are contemplating the purchase of a hardware

John and Sally Claussen are contemplating the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of \$74,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated \$440,000. 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 %   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.) (Use PV of \$1 and PVA of \$1) (Round “PV Factors” to 5 decimal places, intermediate and final answer to the nearest dollar amount.)

Here’s the SOLUTION

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