Kieso, Intermediate Accounting, 16e INTERMEDIATE ACCT (ACCT 221/323/322) Home Re

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Kieso, Intermediate Accounting, 16e INTERMEDIATE ACCT (ACCT 221/323/322) Home Read, Study& Practice Assignment Gradebook ORION Downloadable eTextbook AssignmentOpen Assignment CALCULATOR MESSAGE MY INSTRUCTOR FULL SCREEN PRINTER VERSIONBACK NEXT ASSIGNMENT RESOURCES Problem 6-3 c6 Graded Homework- Chiasson 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 11,300 square yards. oblem (6 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 Review Results by Study Bid B: A surface that costs $10.75 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 12 cents per square yard. Compute present value of the bids. You may assume that the cost of capital is 12%, 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 Click if you would like to Show Work for this question:

Explanation / Answer

CASH FLOW FOR BID A Installation cost=$5.25*11300= $              59,325 Annual maintenance cost(Except last year)= 0.25*11300= $        2,825 Present value of cash flow=(Cash flow)/((1+i)^N) i=Discount rate= Cost of capital=12%=0.12 N=Year of cash flow N A B=A/(1.12^N) Year Cash flow PV of cashflow 0 $              59,325 59325 1 $2,825 2522.321429 2 $2,825 2252.072704 3 $2,825 2010.7792 4 $2,825 1795.338571 5 $              59,325 33662.59822 6 $2,825 1431.232917 7 $2,825 1277.886533 8 $2,825 1140.970119 9 $2,825 1018.723321 10 $0 0 TOTAL 106436.923 Present value of outflow $     106,436.92 CASH FLOW FOR BID B Installation cost=$10.75*11300= $           121,475 Annual maintenance cost(Except last year)= 0.12*11300= $        1,356 Present value of cash flow=(Cash flow)/((1+i)^N) i=Discount rate= Cost of capital=12%=0.12 N=Year of cash flow N A B=A/(1.12^N) Year Cash flow PV of cashflow 0 $           121,475 121475 1 $1,356 1210.714286 2 $1,356 1080.994898 3 $1,356 965.174016 4 $1,356 861.7625143 5 $1,356 769.4308164 6 $1,356 686.9918003 7 $1,356 613.385536 8 $1,356 547.6656571 9 $1,356 488.9871939 10 $0 0 TOTAL 128700.1067 Present value of outflow $     128,700.11 Present Value of outflow Bid A $        106,437 Present Value of outflow Bid B $        128,700 Wallmart should accept BID A

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