Question

Net Present Value Method—Annuity

E & T Excavation Company is planning an investment of $222,900 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $130 per hour for bulldozer work. The bulldozer operator costs $26 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $10,000. The bulldozer uses fuel that is expected to cost $34 per hour of bulldozer operation.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine the equal annual net cash flows from operating the bulldozer. Enter all amounts as positive numbers.

Cash inflows:
Hours of operation
Revenue per hour			×$
Revenue per year				$
Cash outflows:
Hours of operation
	Fuel cost per hour	$
	Labor cost per hour
	Total fuel and labor costs per hour		×$
Fuel and labor costs per year
Maintenance costs per year
Annual net cash flow				$

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 above. If required, round to the nearest dollar and use the minus sign to indicate a negative net present value.

Present value of annual net cash flows	$
Less amount to be invested
Net present value	$

c. E & T Excavation should Selectsupportnot supportItem 14 the investment because the bulldozer cost is SelectgreaterlessItem 15 than the present value of the cash flows at the SelectmaximumminimumItem 16 desired rate of return of 10%.

Answer 1

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Part a
Cash inflows:
Hours of operation		1,000
Revenue per hour		$        130
Revenue per year			$ 130,000
Cash outflows:
Hours of operation		1,000
Fuel cost per hour		$          34
Labor cost per hour		$          26
Total fuel and labor costs per hour		$          60
Fuel and labor costs per year			$    60,000
Maintenance costs per year			$    10,000
Annual net cash flow			$    60,000
Part b
Annual Net Cash Flow			$    60,000
PVAF of $1, n=5,i=10%			3.791
Present Value of annual Net Cash Flow			$ 227,460
Less: Investment			$-222,900
Net Present Value			$      4,560
Part c
Should select since NPV is positive