Question

Assume that Wal-Mart, 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 Bid A or Bid B

Answer 1

PRESENT VALUE OF BID A
Year	cash outfows	PVF @ 9%	Present value
0	64900	1.00000	64900
1	2950	0.91743	2706.422
2	2950	0.84168	2482.956
3	2950	0.77218	2277.941
4	2950	0.70843	2089.854
5	67850	0.64993	44097.84
6	2950	0.59627	1758.989
7	2950	0.54703	1613.751
8	2950	0.50187	1480.506
9	2950	0.46043	1358.262
10	2950	0.42241	1246.112
Present value of outflowws			126013
Note: Outflow in Year 0= 11800 sq. yards @$5.50 = $ 64,900
Outflow of annual maintenance cost = 11,800 sq. yards @$0.25 = $2950
Outflow in Year 5 = $64,900 +$2950 = $67850
PRESENT VALUE OF BID B
Year	cash outfows	PVF @ 9%	Present value
0	129800	1.00000	129800
1	1062	0.91743	974.3119
2	1062	0.84168	893.8642
3	1062	0.77218	820.0589
4	1062	0.70843	752.3476
5	1062	0.64993	690.2271
6	1062	0.59627	633.2359
7	1062	0.54703	580.9504
8	1062	0.50187	532.982
9	1062	0.46043	488.9743
10	1062	0.42241	448.6003
Present value of outflowws			136616
Note: Outflow in Year 0= 11800 sq. yards @$11.00 = $ 129800
Outflow of annual maintenance cost = 11,800 sq. yards @$0.09 = $1062
Therefore, Bid A shall be accepted with low present value off outflow