Compute the present value of outflows for bid a and b

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Reference no: EM13141029

Assume that Supermart, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its discount-retail outlets 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 12,300 square yards.

Bid A: A surface that costs $5.76 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 28 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 $10.51 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 11 cents per square yard.

Calculate the present value of outflows for Bid A & B and then determine which bid should be accepted by Supermart Inc. You may assume that the cost of capital is 11%, 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.

Reference no: EM13141029

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