Question

Net Present Value Method—Annuity

Jones Excavation Company is planning an investment of $434,200 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $140 per hour for bulldozer work. The bulldozer operator costs $27 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 $35 per hour of bulldozer operation.

Net Present Value Method—Annuity Jones Excavation Company is planning an investment of $434,200 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $140 per hour for bulldozer work. The bulldozer operator costs $27 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 $35 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. Jones Excavation Company Equal Annual Net Cash Flows 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 flows $ Feedback a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue). b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. Use the 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 Jones invest in the bulldozer, based on this analysis? Yes , because the bulldozer cost is less than  the present value of the cash flows at the minimum desired rate of return of 20%. 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

a. Determine the equal annual net cash flows from operating the bulldozer.

Jones Excavation Company
Equal Annual Net Cash Flows
Cash inflows:
		× $
			$
Cash outflows:
	$
		× $
			$

b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. Use the 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 Jones invest in the bulldozer, based on this analysis?
, because the bulldozer cost is   the present value of the cash flows at the minimum desired rate of return of 20%.

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

Answer 1

a
Jones Excavation Company
Equal Annual Net Cash Flows
Cash inflows:
Hours of operation		2000
Revenue per hour		140
Revenue per year			280000
Cash outflows:
Hours of operation		2000
Fuel cost per hour	35
Labor cost per hour	27
Total fuel and labor costs per hour		62
Fuel and labor costs per year			-124000
Maintenance costs per year			-20000
Annual net cash flows			136000
b
Present value of annual net cash flows	452336	=136000*3.326
Amount to be invested	434200
Net present value	18136

c

Yes , because the bulldozer cost is less than the present value of the cash flows at the minimum desired rate of return of 20%.

d

3.326*((Hours*140)-(Hours*62)-20000) = 434200

466hours-206hours-66520 = 434200

260hours = 500720

Hours = 500720/260 = 1926

Number of operating hours = 1926 hours