Question

Assume that BLANK 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 11,900 square yards.

Bid A: A surface that costs $5.75 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 $10.00 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.


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 BLANK

BLANK should accept Bid A OR Bid B .

Answer 1

cash outflow C3 D E 1 Bid A 2 present value of present cash outflow value factor cash outflow $68,425 $2,975 $68,425 Present value of outflows for Bid A $68,425 $17,836 initial surface 4 1.00000 annual maintenance cost 5 5.99525 $44,471 $130,732 replacement surface 6 0.64993 7 8 Bid B present value of present cash outflow value factor cash outflow 10 $119,000 $119,000 $6,421 initial surface 11 1.00000 $1,071 Present value of outflows for Bid B annual maintenance cost 12 5.99525 $125,421 13 14 Present value of outflows for Bid A $ 130,732 15 Present value of outflows for Bid B $125,421 16 17 BLANK should accept Bid B 18 reason because Bid B has lower present value of cash outflows 19 20 st

for formulas and calculations, refer to the image below -

cash outflow C3 D E F 1 Bid A 2 cash outflow present value factor present value of cash outflow 3 -5.75*11900-ROUND(-PV(9%,0,0,1),5)C4*D4 -0.25*11900-ROUND(-PV(9%,9,1,0),5)C5*D5 -5.75*11900-ROUND(-PV (9%,5,0,1),5) C6*D6 initial surface 4 annual maintenance cost 5 replacement surface 6 Present value of outflows for Bid A =ROUND(SUM(E4: E6),0) 7 8 Bid B cash outflow present value factor present value of cash outflow 10 =ROUND(-PV(9%,0,0,1),5) C11*D11 -0.09*11900-ROUND(-PV (9%,9,1,0),5) C12*D12 initial surface - 10*11900 11 annual maintenance cost 12 Present value of outflows for Bid B -ROUND (SUM(E11:E12),0) 13 14 Present value of outflows for Bid AE7 15 Present value of outflows for Bid BE13 16 17 BLANK should accept Bid B 18 reason because Bid B has lower present value of cash outflows 19 20 X . mst LO LON co

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