With the extra cash from operations, Ace Auto Parts decides to purchases a Savings and Loan. Ace will pay $400,000 for the S & L with the intention of selling it after 5 years. Ace hopes to earn 20% before-tax rate of return. The expected inflation rate is 5%.
a. What should be the amount of the sale price, if Ace is to earn a 20% return on their investment? Exclude the effects of inflation.
b. What should be the amount of the sale price, if Ace is to earn a 20% return on their investment after considering the effects of inflation?