Question

Jones Excavation Company is planning an investment of $177,900 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for five years. Customers will be charged $120 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 $20,000. 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	3.353	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:
		× $
			$
Cash outflows:
	$
		× $
			$

b. Determine the net present value of the investment, assuming that the desired rate of return is 6%. Use the present value of an annuityof $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 6%.

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)

EQUAL ANNUAL NET CASH FLOW
Cash inflow
Revenue (120*2000)		240000
Cash outflow
operators cost (38*2000)	76000
Fuel cost (50*2000)	100000
Annual maintenance cost	20000
Total cash outflow		(196000)
Annual net cash flow		44000

b)

Present value of annual net cash flow (PVA6%,5*annual cash flow )	4.212*44000 185328
less:Initial investment	-177900
Net present value	7428

c)

Yes,Jones should invest in bulldozer because the bulldozer cost is less than present value cash flow at desired rate of return

d)Amount invested = [Present value of annual cash flow]

or Amount invested =[PVA6%,5*annual cash flow]

      177900 =[4.212 *annual cash flow]

    annual cash flow = 177900/4.212

              = $ 42236

Now

Annual cash flow =Number of hours [revenue -operating cost per hour -fuel cost per hour ]-fixed cost

                42236 = H [120-38-50]-20000

                 42236 = H [32] -20000

                42236+20000 = 32H

                   H = 62236/32

                      = 1945 Hours

at 1945 hours ,presebt value of cash flow is equals to amount invested.