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 12,600 square yards. Bid A: A surface that costs $5 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 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 8 cents per square yard. (Use the tables below.)

Explanation / Answer

I still cannot see the images as they lead to a Wileyplus page which probably requires a password. I am answering without the images.

Bid A:

Initial cashflow at year 0 = 5*12,600 = 63,000 (this repeats after yr 5 also)

Thereafter, annual cashflows in years 1-4 and 6-9 = 12,600*0.25 = 3150

So net cost today = 63,000 + 3150/1.08^1 + 3150/1.08^2 + 3150/1.08^3 + 3150/1.08^4 + 63,000/1.08^5 + 3150/1.08^6 + 3150/1.08^7 + 3150/1.08^8 + 3150/1.08^9 = 123,410.6

Bid B:

Initial cashflow at year 0 = 10*12,600 = 126,000

Thereafter, annual cashflows in years 1-9 = 12,600*0.08 = 1008

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