Question

1. Net Present Value MethodA series of equal net cash flows at fixed time intervals.—Annuity

   Briggs Excavation Company is planning an investment of $611,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight years. Customers will be charged $150 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $20,000. The bulldozer uses fuel that is expected to cost $39 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. Use a minus sign to indicate cash outflows.

   Briggs Excavation Company
   Equal Annual Net Cash Flows
   Cash inflows:
   Hours of operation Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Revenue per hour Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per hour		X $
   Revenue per year Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per year			$
   Cash outflows:
   Hours of operation Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Fuel cost per hour Annual net cash flows Fuel cost per hour Revenue per year Revenue per hour	$
   Labor cost per hour Annual net cash flows Labor cost per hour Revenue per year Revenue per hour
   Total fuel and labor costs per hour Annual net cash flows Total fuel and labor costs per hour Revenue per year Revenue per hour		X $
   Fuel and labor costs per year Annual net cash flows Fuel and labor costs per year Revenue per year Revenue per hour
   Maintenance costs per year Annual net cash flows Maintenance costs per year Revenue per year Revenue per hour
   Annual net cash flows Annual net cash flows Hours of operation Revenue per year Revenue per hour			$

   Feedback

   b. Determine the net present value of the investment, assuming that the desired rate of return is 15%. Use the The sum of the present values of a series of equal “Net cash flows” to be received at fixed time intervals.present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

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

   c. Should Briggs Excavation invest in the bulldozer, based on this analysis?
   

   • Yes
   • No
   , because the bulldozer cost is
   • less than
   • more than
   the present value of the cash flows at the minimum desired rate of return of 15%.

   d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested. Round interim calculations and final answer to the nearest whole number.
   hours

   Feedback

   b. Multiply the annual net cash flow by the present value of an annuity factor and subtract the amount to be invested.

   c. Which is more favorable?

   d. Set up an equation to solve for hours.

   Learning Objective 3.

   Feedback

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Answer 1

Initial Investment=$611700

Life= 8 years

Annual Operation in Hours = 2000

Revenue per hour = $150

Operator cost per hour=$30

Fuel cost per hour = $39

Annual Maintenance cost=$20000

Answer a

Cash inflow:

Total cash inflow=Total Revenue per year = 2000*150=$300,000

Cash Outflow:

Operator cost per year = 2000*30=$60,000

Fuel cost per year = 2000*39=$78,000

Annual Maintenance cost=$20000

Total cash outflow =60000+78000+20000=$158000

Hence Net annual cash flow = Cash inflow-Cash outflow=300000-158000=$142,000

Answer b

PV factor for annuity of $1 for 8 years at 15% = 4.487

Hence PV of annual cash flow = 142000*4.487 = $637154

Hence Net PV =PV of annual cash flows- Initial cost = 637154-611700=$25454

Answer c

Answer is yes as the PV of cash flow is more than the Bulldozer initial cost

Answer d

PV of Annual cashflow should be $611700

Hence Annual Cashflow should be 611700/4.487 = $136327.17

Say no of hours =x

then Annual cashflow = 150x - (30x+39x+20000)

or, 136327.17 = 150x-69x-20000

or, 136327.17+20000=81x

or, x = 156327.17/81=1929.97 hours or 1930 hours