P 5-5 Investment decision; varying rates .LO5-3, LO5-8 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 $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 Years 6-10 Years 11-20 8% 10% 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.) Years 1-5 Years 6-10 Years 11-20 End of Year 20 $ Yearly Cash Flow 70,000 70,000 Maximum Purchase Price 70,000 400,000 Time Period 10 10 CLAUSSEN PURCHASE Estimated Cash Flows Interest Rate *Factor PVA PV TABLE 2 Present Value of $1 $1 PV = 1.8% 2.0% 2.9% 30% SS m 10% 80% 0.0% 10.0% 110% 12.0% 1 050010 0.58522 098039 097561 097087 0.56518 096154 0.95694 095238 094787 0.54340 055458 092555 091743 050505 090090 089286 2 0.50000 0.97000 096117 095181 094260 093351 052456 091573 0.90703 0899845 089000 0.87344 085734 084108 082045 081162 079719 3 097060 095632 094232 0.92860 091514 090194 088900 0.87635 085334 085161 083962 085630 070383 077218 075131 073119 071178 4 0.56058 094218 0.92385 0.90595 088849 087144 0.85489 083855 0.82270 0.80722 0.79209 0.76290 0.79503 0.70843 068301 065873 063552 5 0.95147 0.92826 090573 088385 086261 084197 0.82193 080245 0.78353 076513 071726 071299 0:60058 061993 062092 058345 0.56743 0.54205 0.31454 0.03797 0.86230 0.33748 0.01350 0.73031 0.75790 0.74622 0.72525 030450 0.00034 0.63017 0.55627 0.50447 0.53404 0.50003 7 093272 090103 087056 084127 081309 078599 075992 073483 0.71068 0.88744 066506 062275 0.58349 054703 051316 046166 045235 8052348 088771 085345 082075 078941 075941 073069 070319 0.87654 0.85160 062741 0.58201 054027 050187 046651 043393 040388 091434 087459 083676 080073 070042 073373 070259 0.87290 0.04401 0.01700059190054393 050005 0.40043 042410 035092 0.30061 10 000530 086167 083035 0.78130 074400 070852 067555 064303 061301 058543 055830 050836 0.46310 642241 038664 036318 0.32167 11 089632 0.84893 080426 076214 0.72242 0.58495 0.55 0.01620 0.58468 0.55491 0.52679 0.47509 0.42809 0.38753 035049 0.31728 0.28748 12 088748 0836.39 0.78849 0.74356 070138 066178 062460 053965 0.55654 0.52508 040807 044401 0.39711 0.35553 031863 0.28584 025668 13 087800 0.82403 0.77303 0.72542 0.00035 0.03340 0.00007050427 0.33032 0.45000 0.4004 0.41490 030770 032018 028900 0.25751 0.22917 14 086996 081185 0.75788 0.70773 066112 061778 057748 053997 050507 0.47257 0.44230 0.38782 034046 029025 026333 023190 020462 15 0.86135 0.79585 0.74301 0.65047 064186 0.59589 0.55525 051672 045102 044795 041727 0.36245 031524 027454 023939 020900 0.18270 7.0% 16 085282 0.78803 0.72845 0.67362 17 004430 0.77633 0.71416 0.65720 060502 18080602 076491 070016064117 0.58739 057671 0.53391 0.49447 0.458 0.42458 0.39365 0.33873 0.299 0.25187 021763 0.18829 0.16302 055720 051337 0.47318 0.43630 0.40245 037136 031007 0.27027 023107 0.13704 0.16063 0.14564 0.53836 0.49363 0.45290 041552 030147 035001 0.29506 025025 021199 0.17506 015282 013004 19 082774 0.75361 068643 062553 0.57029 052016 047454 043330 0.39573 0.36158 0.33051 0.27651 023171 0.19449 016351 0.13768 011611 20 081954 0.74247 0.67297 0.01027 0.55368 0.50257 0.45533 0.41464 0.37039 0.34273 031100 023042 021405 0.17843 0.14004 0.12403 010367 TABLE 6 Present Value of an Annuity Due of $1 PVAD xH+ 1.0% 15 25% 3.0% 30% 4.9% 50% 5.5% 6.03 7,0% 80% 9.0% 10.03 11,0% 11.00000 1.00000 100000 100000 1.00000 1.00000 1.00000 1.00000 1.00000 100000 100000 1.00000 1.00000 100000 100000 100000 1.0000 2 199010 198522 198009 197561 1.87087 190616 196154 1.95091 194787 193458 192590 191743 1.90909 190090 1,8928 3207040 2050 204150 201742 2.01347 200000 200000 207267 205341 204632 203330 2.00002 2.7325 275011 2.73554 271252 25000 4 294099 2912201 205002 2.2001 2.80164 2.77509 274 272125 10972 267201 3.62432 3.57710 253129 242085 244271 24018 5450197 455438 480773 478197 471710 467308 457900 458753 454505 450515 446511 4.38721 431213 473977 416387 410345 4.0373 4.79079 4.69590 4.6047 535525 523054 51114 5.06242 571220 5.35637 9865168 848523 832546 817014 01960 7.87396 7.73274 759589 7.46321 733457 720979 6.97130 674664 653482 63303 614612 5.9676 10 356802 3.35052 9.16224 837037 8.78811 880765 8.43553 826879 810782 7.95220 7.80169 751523 724680 535525 6.75302 653705 6.3282 11 10.47130 1022218 998259 9.75206 9.53020 9.11090 8.91272 8.72173 853763836009802358 7.71008 7.41766 12 11.30763 11.07112 10.7885 10.31421 10.25262 10.00155 5.76045 952052 330841 303254 880687 8.49057 8.13000 7.40519 7.40000 720652 6.3377 13 1225500 11.90751 11.57534 11.25776 10.90-400 10.56333 10.30507 10.11050325 901052 930304 8.34259 853000 10073 701300 7.45230 7.1943 14 13:13374 12.73153 1234837 11.98318 1165496 11.30274 10.98565 1068288 10 39357 10.11708 985268 9.35765 890978 848610 810338 774087 74235 15 14.00370 1354338 13.10025 12.03031 12.29007 11.92052 11.56312 11.22283 10.89864 10.53505 1029458 3.74547 324424 8.78015 8.30009 7.98187 7.3281 G 5.85343 5.78264 5.71346 5.64583 5.57871 551506 5.45182 5.38950 532948 5.27028 5.21236 5.10020 499271 4.88965 7 679548 650719 660143 850813 641710 6.32855 6.74714 615787 607560 539553 591737 5.76654 5872 548512 7.72019 750021 7.47100 7.34939 7.23020 7.11454 7.00205 G00270 G70637 GG207 G50230 6.30929 20637 503215 714457 638923 6.5502 2.0% 8.50508 819087 78108 6.82371 637916 7.3732 902155 854879 8.1195 920141 870162 8.2495 15 14.86505 14.34323 13.84526 13.38138 12.53794 12.51741 12.11839 11.73955 11.37966103758 10.71225 10.10791 955048 905059 17 15.71787 15.13126 1457771 14.05500 13.50110 13.05412 12.85230 1223402 1183777 11.40210 11.10500 10.44605 3.05137 3.31256 18 16.56225 15.90785 15.29187 14.71220 14.16812 1345132 13.16567 1270719 1227407 11.88461 1147726 10.76322 10.12164 954363 19 17.39827 16.57256 1599203 15.35336 14.75351 14.18968 13.65950 13.15999 1268959 12.24507 1182760 11.05909 10.37189 975563 20 18:22001 17.42517 16.67545 15.37839 15.22380 14.70584 1413394 1355329 1308532 12.00705 1215812 11.33500 1000000 9.95011 5.30452 883929 8.3657 21 12.04555 18.15854 17.35143 16.58316 15.87747 15.21240 14.59033 14.00794 13.45221 12.95038 12.40992 11.55401 10.81815 10.12855 351356 856333 8.4694 25 2224339 21.03041 1991393 18.31499 17.93554 17.05837 16.24596 15.49548 1479864 14.15170 1355030 12.40033 1152075 10.70651 9.50474 934814 8.7843 30 26.06579 24.37608 2284438 21.45355 20.18845 19.03577 17.98371 1702189 1614107 15.33310 1459072 13.27767 12.15841 11.15828 10.36961 965011 90218 40 33.16303 30.35458 27.50259 25.73034 25.80822 22.10250 20.58448 19.22966 1801704 16.32506 1554507 14.25493 1287858 11.72552 10.75890 993567 9.2330