Question

Question 5 Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers. Management is considering the following bids involving two different qualities of surfacing for a parking area of 11,800 square yards.

Bid A: A surface that costs $5.50 per square yard to install. This surface will have to be replaced at the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square yard for each year except the last year of its service. The replacement surface will be similar to the initial surface.

Bid B: A surface that costs $11.00 per square yard to install. This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year, at an estimated cost of 9 cents per square yard.

Compute present value of the bids. You may assume that the cost of capital is 9%, that the annual maintenance expenditures are incurred at the end of each year, and that prices are not expected to change during the next 10 years. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Present value of outflows for Bid A $ __________

Present value of outflows for Bid B $ ___________

Which bid should be accepted by Wal-Mart. Wal-Mart should accept .

Answer 1

	BID A	BID B
Initial cost	64,900.00	129,800.00
Yearly Maintenance Cost	2,950.00	1,062.00

BID -A

Year	Annual Cash flow	PV Factor	Present Value
0	64,900.00	1	64,900.00
1	2,950.00	0.91743	2,706.42
2	2,950.00	0.84167	2,482.93
3	2,950.00	0.77218	2,277.93
4	2,950.00	0.70843	2,089.87
5	64,900.00	0.64993	42,180.46
6	2,950.00	0.59626	1,758.97
7	2,950.00	0.54703	1,613.74
8	2,950.00	0.50186	1,480.49
9	2,950.00	0.46042	1,358.24
Net Present Value	122,849

BID -B

Year	Annual Cash flow	PV Factor	Present Value
0	129,800.00	1	129,800.00
1	1,062.00	0.91743	974.31
2	1,062.00	0.84167	893.85
3	1,062.00	0.77218	820.06
4	1,062.00	0.70843	752.35
5	1,062.00	0.64993	690.23
6	1,062.00	0.59626	633.23
7	1,062.00	0.54703	580.95
8	1,062.00	0.50186	532.98
9	1,062.00	0.46042	488.97
Net Present Value	136,167

Since BID A Present Value is lower then this bid should be accepted