Question

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 12400 square yards.

Bid A: A surface that costs $5.25 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 $9.75 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.

Wal-Mart should accept                                                           Bid ABid B.

Answer 1

Present value of outflows for Bid A	$ 121,450
Present value of outflows for Bid B	$ 128,041
Lower present value of outflows is better. Therefore, Walmart should accept Bid A
Which bid should be accepted by Wal-Mart.
Wal-Mart should accept	Bid A

Present value of outflows for Bid A
	Year	Cash outflow	Present value factor @10%	Present Value
Installation cost (5.25*12400)	0	$        65,100	1.00000	$             65,100
Maintenance cost (0.25*12400)	1	$          3,100	0.90909	$               2,818
Maintenance cost	2	$          3,100	0.82645	$               2,562
Maintenance cost	3	$          3,100	0.75131	$               2,329
Maintenance cost	4	$          3,100	0.68301	$               2,117
Installation cost	5	$        65,100	0.62092	$             40,422
Maintenance cost	6	$          3,100	0.56447	$               1,750
Maintenance cost	7	$          3,100	0.51316	$               1,591
Maintenance cost	8	$          3,100	0.46651	$               1,446
Maintenance cost	9	$          3,100	0.42410	$               1,315
	10		0.38554	$                      -
Present value of outflows for Bid A				$          121,450

Present value of outflows for Bid B
	Year	Cash outflow	Present value factor @10%	Present Value
Installation cost (9.75*12400)	0	$     120,900	1.00000	$          120,900
Maintenance cost (0.10*12400)	1	$          1,240	0.90909	$               1,127
Maintenance cost	2	$          1,240	0.82645	$               1,025
Maintenance cost	3	$          1,240	0.75131	$                   932
Maintenance cost	4	$          1,240	0.68301	$                   847
Installation cost	5	$          1,240	0.62092	$                   770
Maintenance cost	6	$          1,240	0.56447	$                   700
Maintenance cost	7	$          1,240	0.51316	$                   636
Maintenance cost	8	$          1,240	0.46651	$                   578
Maintenance cost	9	$          1,240	0.42410	$                   526
	10		0.38554	$                      -
Present value of outflows for Bid B				$          128,041