Pender Ltd.is analyzing two proposals for cleaning contracts for the next 3 year period.The company has 200,000 square metres of floor space which is currently 75% occupied.It expects that occupancy will increase to 82% in year 2, and 90% in year 3.The proposal from Company A is as follows:
Six janitors will be used at a budgeted annual salary of $26,000/each.These salaries are expected to remain static over the 3 year period.One supervisor will be used at an annual salary of $38,000.Salary increases for the supervisor will be $1,500 per year.Indirect labour costs are at 12.5% of salaries.Indirect material costs will be at a rate of $0.20 per square metre occupied.Fixed costs of $7,200 per year will also be charged to Pender by the contractor.The proposal from Company B is as follows:
A rate of $1.40 per square metre occupied will be charged.In addition a part time supervisor will be required at an annual cost of $24,000 plus benefits at 15%.Fixed costs of $4,600 per year will be charged to Pender by Company B.No increases are forecast through the three year period.Additional information:
Company A is the existing contractor.If the agency does not choose Company A, it must pay Company A a flat $8,000 on termination of its services.This payment would be made immediately.Assume cash flows occur at the end of the year unless otherwise stated.The discount rate to be used is 6% and is not expected to change in the next 3 years.Required:
Evaluate these two proposals using the net present value method.

Question

Quizplus · Accepted Answer

The Answer of Pender Ltd.is analyzing two proposals for cleaning contracts for the next 3 year period.The company has 200,000 square metres of floor space which is currently 75% occupied.It expects that occupancy will increase to 82% in year 2, and 90% in year 3.The proposal from Company A is as follows:
Six janitors will be used at a budgeted annual salary of $26,000/each.These salaries are expected to remain static over the 3 year period.One supervisor will be used at an annual salary of $38,000.Salary increases for the supervisor will be $1,500 per year.Indirect labour costs are at 12.5% of salaries.Indirect material costs will be at a rate of $0.20 per square metre occupied.Fixed costs of $7,200 per year will also be charged to Pender by the contractor.The proposal from Company B is as follows:
A rate of $1.40 per square metre occupied will be charged.In addition a part time supervisor will be required at an annual cost of $24,000 plus benefits at 15%.Fixed costs of $4,600 per year will be charged to Pender by Company B.No increases are forecast through the three year period.Additional information:
Company A is the existing contractor.If the agency does not choose Company A, it must pay Company A a flat $8,000 on termination of its services.This payment would be made immediately.Assume cash flows occur at the end of the year unless otherwise stated.The discount rate to be used is 6% and is not expected to change in the next 3 years.Required:
Evaluate these two proposals using the net present value method.