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The cash flows and present value analysis for each of the two proposals are presented below:
COMPANY A--PROPOSAL Year 1 Year 2 Year 3
Square metres occupied 150,000 164,000 180,000
Cleaning salaries (6 @ $26,000) $156,000 $156,000 $156,000
Supervisor $38,000 $39,500 $41,000
SUBTOTAL $194,000 $195,500 $197,000
Indirect labour (12.5% of salaries) $24,250 $24,438 $24,625
Indirect material ($0.20/sq m occupied) $30,000 $32,800 $36,000
Fixed costs $7,200 $7,200 $7,200
Total costs $255,450 $259,938 $264,825
PV FACTOR 6%i 0.9433962 0.8899964 0.8396193
PV ACF $240,991 $231,343 $222,352
TOTAL PV ACF (all years) $694,686
And for Company B:
COMPANY B--PROPOSAL Year 1 Year 2 Year 3
Square metres occupied 150,000 164,000 180,000
Supervisor $24,000 $24,000 $24,000
Benefits (15% of salaries) $3,600 $3,600 $3,600
Variable costs ($1.40/sq m occupied) $210,000 $229,600 $252,000
Fixed costs $4,600 $4,600 $4,600
Total Costs $242,200 $261,800 $284,200
PV FACTOR 6%i 0.9433962 0.8899964 0.8396193
PV ACF $228,491 $233,001 $238,620
Subtotal all years $700,111
Termination payment $8,000
Total NPV $708,111
Pender should select Company A's proposal as it will save $13,425 [$708,111-$694,686]
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