Net Present Value MethodAnnuity

Briggs Excavation Company is planning an investment of $73,300 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for six years. Customers will be charged $110 per hour for bulldozer work. The bulldozer operator costs $34 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $10,000. The bulldozer uses fuel that is expected to cost $45 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

Question Content Area

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

blank Briggs Excavation Equal Annual Net Cash Flow

Cash inflows:
Fuel and labor costs per yearHours of operationMaintenance costs per yearTotal fuel and labor costs per hourHours of operation		Hours of operation
Fuel and labor costs per yearFuel cost per hourLabor cost per hourRevenue per hourRevenue per hour		$Revenue per hour
Fuel and labor costs per yearFuel cost per hourLabor cost per hourRevenue per yearRevenue per year			$Revenue per year
Cash outflows:
Fuel and labor costs per yearHours of operationMaintenance costs per yearTotal fuel and labor costs per hourHours of operation		Hours of operation
Annual net cash flowFuel cost per hourRevenue per yearRevenue per hourFuel cost per hour	$Fuel cost per hour
Annual net cash flowLabor cost per hourRevenue per yearRevenue per hourLabor cost per hour	Labor cost per hour
Annual net cash flowTotal fuel and labor costs per hourRevenue per yearRevenue per hourTotal fuel and labor costs per hour		$Total fuel and labor costs per hour
Annual net cash flowFuel and labor costs per yearRevenue per yearRevenue per hourFuel and labor costs per year			Fuel and labor costs per year
Annual net cash flowMaintenance costs per yearRevenue per yearRevenue per hourMaintenance costs per year			Maintenance costs per year
Annual net cash flowHours of operationRevenue per yearRevenue per hourAnnual net cash flow			$Annual net cash flow

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a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue).

Question Content Area

b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. 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	$fill in the blank 110f94f88fd5051_1
Amount to be invested	$fill in the blank 110f94f88fd5051_2
Net present value	$fill in the blank 110f94f88fd5051_3

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

YesNoNo

, because the bulldozer cost is

less thanmore thanmore than

the present value of the cash flows at the minimum desired rate of return of 20%.

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)