Question

Problem 6-3

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 12,500 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 10 cents per square yard.

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Compute present value of the bids. You may assume that the cost of capital is 10%, 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.

Answer 1

Present value of outflows for Bid A	129,435
Present value of outflows for Bid B	144,699

Bid A will be Accepted.

BID A Year Installation/Replacement cost Maintainance Cost Total Outflow PV Factor Present value 0                68,750                68,750 1            68,750 1          3,125                   3,125 0.90909              2,841 2          3,125                   3,125 0.82645              2,583 3          3,125                   3,125 0.75131              2,348 4          3,125                   3,125 0.68301              2,134 5                68,750                68,750 0.62092            42,688 6          3,125                   3,125 0.56447              1,764 7          3,125                   3,125 0.51316              1,604 8          3,125                   3,125 0.46651              1,458 9          3,125                   3,125 0.4241              1,325 10                          -   0.38554                     -            127,495

Installation/Replacement cost	5.5*12500	68,750
Maintainance Cost	0.25*12500	3,125

BID B
Year	Installation	Maintainance Cost	Total Outflow	PV Factor	Present value
0	137,500		137,500	1	137,500
1		1,250	1,250	0.90909	1,136
2		1,250	1,250	0.82645	1,033
3		1,250	1,250	0.75131	939
4		1,250	1,250	0.68301	854
5		1,250	1,250	0.62092	776
6		1,250	1,250	0.56447	706
7		1,250	1,250	0.51316	641
8		1,250	1,250	0.46651	583
9		1,250	1,250	0.4241	530
10			-	0.38554	-
					144,699

Installation/Replacement cost	11*12500	137500
Maintainance Cost	0.1*12500	1,250

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