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Woody Lightyear is considering the purchase of a toy store from Andy Enterprises. Woody expects the store will generate net cash flows (cash inflows less cash outflows) of $60,000 per year for 20 years. At the end of the 20 years, he intends to sell the store for $600,000. To finance the purchase, Woody will borrow using a 20-year note that requires 9% interest.

Required:
What is the maximum amount Woody should offer Andy for the toy store?

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Answer: $654,769

Explanation:

Woody should find the present value of the cash inflows and the amount he plans to sell the company for after 20 years.

As the cash inflows are constant, they are an annuity.

Present value of annuity = Annuity * Present value interest factor of an annuity, 9%, 20 years

= 60,000 * 9.1285

= $547,710

Add the present value of the selling price:

= 547,710 + 600,000 / (1 + 9%)²⁰

= $654,768.53

= $654,769

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The maximum amount woody should offer is $654,769.

What is the present value annuity factor?

The present value annuity factor is used to calculate today's value of future one-dollar cash flows.

P = PMT * [1 – [ (1 / 1+r)^n] / r]

Given:

Net cash flows=$60,000 for 20 years

Sale price after 20 years=$600,000

Interest Rate=9%

As the cash inflows are constant, their is annuity.

Present value of annuity = Annuity X Present value annuity factor(at the rate 9% for 20 years)

= 60,000 X 9.1285

= $547,710

the selling price should be added as it is the current /todays price

= 547,710 + 600,000 / (1 + 0.9)²⁰

= $654,768.53

= $654,769

Therefore, the above calculation aptly describes  $654,769 is the maximum amount Woody should offer.

Learn more about the present value annuity factor here:

https://brainly.com/question/21801625

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