Net Present Value Method—Annuity Briggs Excavation Company is planning an invest

Question

Net Present Value Method—Annuity

Briggs Excavation Company is planning an investment of $132,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours per year for five years. Customers will be charged $110 per hour for bulldozer work. The bulldozer operator costs $28 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $8,000. The bulldozer uses fuel that is expected to cost $46 per hour of bulldozer operation.

4.192

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

  

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 above. Round to the nearest dollar.

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

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

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

Explanation / Answer

Yearly Equal Cash Inflows = ( 110 - 44 - 28) *1500 - 8000 = 46000

Present Value of Inflows @ 10% = 46000 * PVIFA( 5 years , 10%) = 46000 * 3.791 = 174386

NPV = 174386 - 132500 = 42386

Briggs should invest in the project as it generates additional wealth and NPV is positive

For NPV = 0, PV of inflows = 132500

PV Of Inflows = Annual Cash Flow * 3.791

Annual Cash Flow = 132500 / 3.791 = 34951.20

So, Hours = (34951.20 + 8000) / ( 110 - 46 - 28) = 1193.08 hours

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