Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 yea
ID: 2815319 • Letter: A
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 11,300 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 $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 9 cents per square yard. Click here to view factor tables 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. Wal-Mart should accep
Explanation / Answer
Bid A year 0 1 2 3 4 5 6 7 8 9 10 a installation cost 62150 62150 =11300*5.5 b Maintenance cost 2825 2825 2825 2825 2825 2825 2825 2825 2825 =0.25*11300 c=a+b Total cost 62150 2825 2825 2825 2825 64975 2825 2825 2825 2825 0 d PVIF @9% 1.00000 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 0.54703 0.50187 0.46043 0.42241 e=c*d Present value 62,150 2,592 2,378 2,181 2,001 42,229 1,684 1,545 1,418 1,301 - 119,480 Present value of cost under Bid - A = 119,480 Bid B year 0 1 2 3 4 5 6 7 8 9 10 a installation cost 115825 =11300*10.25 b Maintenance cost 1017 1017 1017 1017 1017 1017 1017 1017 1017 =0.05*11300 c=a+b Total cost 115825 1017 1017 1017 1017 1017 1017 1017 1017 1017 0 d PVIF @9% 1.00000 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 0.54703 0.50187 0.46043 0.42241 e=c*d Present value 115,825 933 856 785 720 661 606 556 510 468 - 121,922 Present value of cost under Bid - B = 121,922 Since present value of cost is lower for Bid B compared to Bid A, we recommend to go with Bid-B
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