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.

Compute 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 answer to 0 decimal places, e.g. 458,581.) I just need the present value of outflows for Bid A.

Explanation / Answer

Solution:

Present Value for outflows for Bid A?

Present value of initial cost 11,600 x $6.25 = $72,500 (incurred today) $ 72,500

Present value of maintenance cost (years 1–4)

11,600 x $.25 = $2,900 R (PVF – OA4,11%) = $2,900 (3.10244) 8,997

Present value of resurfacingFV (PVF 5, 11%) = $72,500 (0.59345) 43,025

Present value of maintenance cost (years 6–9)

R (PVF – OA9–5, 11%) = $2,900 (5.37048 – 3.69897) 5,339

Present value of outflows for Bid A $129,862

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