Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 yea

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 11,600 square yards.

Bid A: A surface that costs $6.25 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 $10.25 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 11 cents per square yard.

Compute the present value of the bids. You may assume that the cost of capital is 11%, 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 answers to 0 decimal places, e.g. 458,581)

Present value of outflows for Bid A =

Present value of outflows for Bid B=

Explanation / Answer

Evaluation of BIDS FOR Wal-Mart Stores, Inc Bid A : Statement of Cost Particular Amount ($) Discounting Factor Present Value Surface Cost 1st Year 72500 1 72500.00 5th year 72500 0.59345 43025.13 Annual Maintenance Cost (for 9 years as for last Year Not incurred) 2900 5.537047 16057.4363 Present Value of Outflow $      131,582.56 Bid B : Statement of Cost Particular Amount ($) Discounting Factor Present Value Surface Cost 1st Year (One Time Expenses) 118900 1 118900.00 Annual Maintenance Cost (for 9 years as for last Year Not incurred) 1276 5.537047 7065.271972 Present Value of Outflow $      125,965.27 Saving if Company Opt For BID B $           5,617.29 Conclusion : It is better to Go for BID B as its gives saving of $5617.26

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