Question
Osborne Excavation Company is planning an investment of $362,600 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight
Osborne Excavation Company is planning an investment of $362,600 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight years. Customers will be charged $115 per hour for bulldozer work. The bulldozer operator costs $26 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 $34 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. Enter all amounts as positive numbers.
| Annual cash inflows: | ||||
| Hours of operation | fill in the blank 1 | |||
| Revenue per hour | $fill in the blank 2 | |||
| Revenue per year | $fill in the blank 3 | |||
| Annual cash outflows: | ||||
| Hours of operation | fill in the blank 4 | |||
| Fuel cost per hour | $fill in the blank 5 | |||
| Labor cost per hour | fill in the blank 6 | |||
| Total fuel and labor costs per hour | $fill in the blank 7 | |||
| Fuel and labor costs per year | fill in the blank 8 | |||
| Maintenance costs per year | fill in the blank 9 | |||
| Annual net cash flow | $fill in the blank 10 | |||
b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. Use the table of present value of an annuity of $1 above. If required, round to the nearest dollar and use the minus sign to indicate a negative net present value.
| Present value of annual net cash flows | $fill in the blank 11 |
| Less amount to be invested | fill in the blank 12 |
| Net present value | $fill in the blank 13 |
c. Osborne Excavation should
supportnot support
the investment because the bulldozer cost is
greaterless
than the present value of the cash flows at the
maximumminimum
desired rate of return of 20%.
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