John and Sally Claussen are contemplating purchase of the hardware store from John Duggan. Claussens expect that store will create cash flows of $80,000 per year for twenty years. At the end of twenty years, they intend to sell store for the estimated $500,000. Claussens will finance investment with the variable rate mortgage. Interest rates will increase twice during twenty-year life of mortgage. Accordingly, Claussens' desired rate of return on investment differs as follows:
|
| Years 1-5 |
|
7 |
% |
| Years 6-10 |
|
9 |
% |
| Years 11-20 |
|
11 |
% |
Determine maximum amount Claussens must pay John Duggan for hardware store? Suppose that all cash flows happen at the end of year.