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.

5.019

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

Bulldozer details Details Amt $ Revenue per hour                     110 less Wages & benefits /hr                        28 Fuel cost /hr                        46 Total Variable cost/hr                        74 Contribution /hr                        36 Yearly working hrs                  1,500 Yearly Contribution margin               54,000 Less Yearly Fixed Maint cost                  8,000 Yearly Cash Flow               46,000              1 Equal Annual Net Cash flow $     46,000.00 b PV annuity factor for 5 years @10%=               3.7910 pv OF Annual Cash flows=46000*3.791=             174,386 Less amount to be invested=           (132,000) Net Present Value=               42,386 c Briggs should invest in the bulldozer as the NPV is positive. d Required PV of cash flows=Investment=             132,000 Annual Cash flow required =132000/3.791=               34,819 Annual Fixed cost =$8000 So Required annual contribution = 34819+8000=               42,819 Contribution per hr=                        36 Required working hrs=42819/36=            1,189.43 hrs

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