Question

Problem 3 (7 marks) The city has asked for bids for a new infrastructure project. The project is to take 5 years to complete. Two of the companies that will bid for the project have provided the following information: Company A Company A Company B Year 400,000 400,000 500,000 514,000 2 500,000 514,000 3 500,000 514,000 500,000 514,000 500,000 514,000 Both companies will require $400,000 at the start of the project and all other cash flows will occur at the start of each year. Company A has a required rate of return of 12% per year while company B has a required rate of return of 14% per year. The city will award the contract and pay the full bid price at the start of the project. What is the bid price and which project will be accepted? Show your time lines and your work!

Answer 1

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B COMPANY A I Cash Flowc discount चिctor @ 12% COMPANY flows a Year esent Valuel of Cashflows discount 1 present Value us factor @ 14% orlash flows 400000 C00000 500000 500000 500000 500000 400000 500000 446500 3800398500 356000 318000 12,419,000 0893 .797 .712 1.636 400000 514000 514000 514000 514000 514000 400000 514000 40 7450778 395266 .877 1.769 .675 .592 346950 304288 2,411,282 ☆ Discount factess can be taken from the annuty table Since the cash flows are occurring at the beginning of each year, discount factors are adjusted accordingly Bid Price of Company 9 - Bid Price of Company B $2,419,000 $2,411,282 Since the bid price of Company B is lesser then that of Company A, therefore, the project will be awarded to company B.