Which bid to accept
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I am trying to determine what the steps to solve homework assignment below are. I am confused with future and present value annuities. Please let me know what steps I have to do. If the formulas can be provided that would be great.
Assume that Wal-Mart, 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 12,000 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 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 $10.50 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 $.09 per square yard.
Prepare computations showing which bid should be accepted by Wal-Mart, Inc. you may assume that the cost of capital is 9%, that the annual expenditures are incurred at the end of each year, and that prices are not expected to change during the next 10 years.
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Solution Summary
The solution explains how to calculate the present value to evaluate which bid should be accepted
Solution Preview
We need to compare the present value of total costs to make the decision.
Bid A - In this the costs are
Initial cost of 12,000 sq. yards X 5.75 per sq yd = $69,000. This cost will be incurred now and at the end of 5 years when the surface is to be replaced. The annual maintenance costs would be incurred in year 1 to 4 and year 6 to 9 as there is no cost in the last year of ...
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