Which bid to accept


Problem:

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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Finance Basics: Which bid to accept
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