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 $124,000 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight years. Customers will be charged $110 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.

a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.

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b. Determine the net present value of the investment, assuming that the desired rate of return is 12%. 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.

c. Should Briggs Excavation invest in the bulldozer, based on this analysis?
No , because the bulldozer cost is more than the present value of the cash flows at the minimum desired rate of return of 12%.

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.

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

Answer for question no.a:

Answer for question no.b:

Desired rate of return=12%

Present value of annual net cash flows =$24,000*4.968

=$119,232.-------------(A)

Amount to be invested=$124,000----------(B)

NPV=(A)-(B)

=-$4,768.

Answer for question no.c:

No, because the bulldozer cost is more than the present value of the cash flows at the minimum desired rate of return of 12%.

Answer for question no.d:

Present value of cash inflows should be $124,000.

Annual net cash flows should be=$124000/annuity factor for 8 years @12%

=$124,000/4.968

=$24,959.74

rounded to $24,960.

110x-88x-20000=$24,960

22x=44960

x=2043.62 hours rounded to 2,044 hours.

Particulars Amount Calculation Cash inflows Hours of operation(1) 8 Revenue per hour(2) 110 Revenue per year(3)=2000*(1)*(2) 220000 2000*110 Cash outflows Hours of operation(4) 2000 Fuel cost per hour(5) 50 Labour cost per hour(6) 38 Total fuel and labour costs per hour(7)=(5)+(6) 88 88 Fuel and labour costs per year(8)=(7)*2000 176000 88*2000 Maintenance costs per year(9) 20000 Annual net cash flow(10)=(3)-(8)-(9) 24000 220000-176000-20000

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