Question

Net Present Value Method—Annuity

Briggs Excavation Company is planning an investment of $789,800 for a bulldozer. The bulldozer is expected to operate for 3,000 hours per year for 10 years. Customers will be charged $140 per hour for bulldozer work. The bulldozer operator costs $38 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $30,000. The bulldozer uses fuel that is expected to cost $50 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:
		$
			$
Cash outflows:
	$
		$
			$

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. 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 Briggs Excavation 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 10%.

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(3000*140)	420,000
2	Cash Outflows
	Operation Cost(3000*38)	-114,000
	Fuel Cost(3000*50)	-150,000
	Annual Maintenance cost	-30,000
3	Annual Cash Inflows(1-2)	126,000
Req B
	PV of Cash Inflows=
	Annual cash Inflows*PVAF(10% 10 Years)	774,270
	(126,000* 6.145)
	Less: Amount to be Invested(Outflows)	-789,800
	Net Present Value	-15,530
Req.C	Since Net present value is Negative, F&T Should not
	invest in Bulldozer
req D
1	PV of cash Inflows	789800
2	PVAF(10% 10 Years)	6.145
3	Annual Cash Inflows(789800/6.145)	128527.3
4	Add: Maintenance costs	30000
5	Total Contribution	158527.3
6	Contribution per Hr(140-38-50)	52
7	Required no of Hours(5/6)	3049