Accounting-ohn and Sally Claussen are contemplating the purchase
by ella | Aug 20, 2025 | Business
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ohn 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 $75,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $450,000. 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:
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|
| Years 1–5 |
|
7 |
% |
| Years 6–10 |
|
9 |
% |
| Years 11–20 |
|
11 |
% |
| 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.)
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2.)
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Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning:
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| 1. |
Pay $1,010,000 in cash immediately. |
| 2. |
Pay $431,000 immediately and the remainder in 10 annual installments of $91,000, with the first installment due in one year.
|
| 3. |
Make 10 annual installments of $153,000 with the first payment due immediately. |
| 4. |
Make one lump-sum payment of $1,720,000 five years from date of purchase. |
| a. |
Assuming that Harding can borrow funds at an 11% interest rate, determine the present value. (Use PV of $1, PVA of $1, and PVAD of $1) (Round “PV Factors” to 5 decimal places and final answers to the nearest dollar amount.)
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| Alternative |
PV |
| 1 |
$ |
| 2 |
$ |
| 3 |
$ |
| 4 |
$ |
| b. |
Which is the best alternative for Harding? |
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|
|
| Alternative 1 |
| Alternative 2 |
| Alternative 3 |
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Alternative 4
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