Question

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

   Briggs Excavation Company is planning an investment of $153,700 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for seven years. Customers will be charged $130 per hour for bulldozer work. The bulldozer operator costs $34 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 $45 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	3.352	2.991
   6	4.917	4.355	4.111	3.784	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
   Equal Annual Net Cash Flow
   Cash inflows:
   Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per hour		$
   Fuel and labor costs per year Fuel cost per hour Labor cost per hour Revenue per year			$
   Cash outflows:
   Fuel and labor costs per year Hours of operation Maintenance costs per year Total fuel and labor costs per hour
   Annual net cash flow Fuel cost per hour Revenue per year Revenue per hour	$
   Annual net cash flow Labor cost per hour Revenue per year Revenue per hour
   Annual net cash flow Total fuel and labor costs per hour Revenue per year Revenue per hour		$
   Annual net cash flow Fuel and labor costs per year Revenue per year Revenue per hour
   Annual net cash flow Maintenance costs per year Revenue per year Revenue per hour
   Annual net cash flow 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 20%. Use the The sum of the present values of a series of equal cash flows to be received at fixed 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 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

Ans:

Req A	Computation of cash inflow per Annum
	Particulars	Amount
1	Cash Inflows
	Revenue(1000*130)	130,000
2	Cash Outflows
	Operation Cost(1000*34)	-34,000
	Fuel Cost(1000*45)	-45,000
	Annual Maintenance cost	-10,000
3	Annual Cash Inflows(1-2)	41,000

Req B
	PV of Cash Inflows=
	Annual cash Inflows*PVAF(20% 7 Years)	147,805
	41,000* 3.605)
	Less: Amount to be Invested(Outflows)	-153,700
	Net Present Value	-5,895
Req.C	Since Net present value is Negative, F&T Should not
	invest in Bulldozer

req D
1	PV of cash Inflows	153700
2	PVAF(20% 7 Years)	3.605
3	Annual Cash Inflows(153700/3.605)	42635.23
4	Add: Maintenance costs	10000
5	Total Contribution	52635.23
6	Contribution per Hr(130-34-45)	51
7	Required no of Hours(5/6)	1032

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