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 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 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 $10.50 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 9 cents per square yard.
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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.
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