Assume that Wal-Mart Stores, Inc. has decided to surface and maintain a vacant lot next to one of its stores to serve as a parking lot for customers for 10 years. 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 $0.25 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 $10.25 per square yard to install.
This surface has a probable useful life of 10 years and will require annual maintenance in each year, except the last year, at an estimated cost of 9 cents per square yard.
Required:
Compute the net present value of the bids.
Assume that the cost of capital is 9%, the annual maintenance expenditures are incurred at the end of each year and that prices are not expected to change during the next 10 years.
(Round factor values to 5 decimal places and final answer to 0 decimal places)
Net Present value of outflows for Bid A$
Net Present value of outflows for Bid B$
Which bid should be accepted by Wal-Mart?