Question

A certain manufacturing plant is being sold and was submitted for bidding. Two bids were submitted by interested buyers. The first bid offered to pay 200,000 pesos each year for 5 years, each payment being made at the beginning of each year. The second bidder offered to pay 120,000 pesos the first year, 180,000 pesos the second year, and 270,000 pesos each year for the next three years, all payments being made at the beginning of each year. If money is worth 12% compounded annually, which bid should the owner of the plant accept?

Answer 1

Solution: Owner should accept the bid of second bidder as present value of second bidder is more than the first bidder.

Explanation: Calculation of present value of first bidder

Year	Amount	Present Value Factor at 12%	Present Value
0	200,000 pesos	1	200,000 pesos
1	200,000 pesos	0.8929	178,580 pesos
2	200,000 pesos	0.7972	159,440 pesos
3	200,000 pesos	0.7118	142,360 pesos
4	200,000 pesos	0.6355	127,100 pesos
	Present Value		807,480 pesos

Calculation of present value of second bidder

Year	Amount	Present Value Factor at 12%	Present Value
0	120,000 pesos	1	120,000 pesos
1	180,000 pesos	0.8929	160,722 pesos
2	270,000 pesos	0.7972	215,244 pesos
3	270,000 pesos	0.7118	192,186 pesos
4	270,000 pesos	0.6355	171,585 pesos
	Present Value		859,737 pesos

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