Two bids have been received to repave a commercial parking lot. Proposal 1 inclu

Question

Two bids have been received to repave a commercial parking lot. Proposal 1 includes new rubs grading, and paving at an initial cost of $250.000. The life of the parking lot surface abstracted in this manner is expected to be 4 years with annual costs for maintenance and painting of pavement marking at $3000. proposal 2 offers pavement of a significantly goer quality with an expected life of 8 years. The annual maintenance cost will be eligible for the pavement, but the markings will have to be repainted every two years at a of $3000. Markings are not pointed the last year of its expected life under proposal 2. the company's current MARR is 12% per year, how much can it afford to spend on arousal 2 initially so the two breakeven?

Explanation / Answer

We need to use use discounting to arrive at the Present value of the future expenses expected for both the proposal and need to calculate the same for both the proposals. However, since the lifespan of both the proposal is different. Since proposal II has longer lifespan we need to extend the lifespan of proposal I by three years so that both the proposals have equal lifespans and can be comparable.

Accordingly there will be additional expenses after the fourth year on repaving and curbing for the Proposal I

Using the PV formula for discounting:

PV = FV / (1 + i)n

Proposal I Present value of cost Year 1 250000 Initial cost 250000.00 Year 2 3000 Annual maintenance cost 2678.57 Year 3 3000 Annual maintenance cost 2391.58 Year 4 3000 Annual maintenance cost 2135.34 Year 5 250000 Repaving after 4 years 158879.52 Year 6 3000 Annual maintenance cost 1702.28 Year 7 3000 Annual maintenance cost 1519.89 Year 8 3000 Annual maintenance cost 1357.05 Total 420664.23 Proposal II Year 3 3000 Maintenance cost 2391.58 Year 5 3000 Maintenance cost 1906.55 Year 7 3000 Maintenance cost 1519.89 Total 5818.03 Difference in cost between Proposal I and Proposal II, which can be the max cost which can be incurred for Proposal II to make both projects comparable 414846.21

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