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| 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 $70,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $400,000. 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%
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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.) PV of $70,000 cash flovw PV of $400,000 selling price Maximum paid for store Years 1-5 Years 6-10 Years 11-20 Year 20 Total
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