Net Present Value Method—Annuity
Briggs Excavation Company is planning an investment of $341,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $125 per hour for bulldozer work. The bulldozer operator costs $31 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 $41 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 |
a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.
Briggs Excavation | |||
Equal Annual Net Cash Flow | |||
Cash inflows: | |||
$ | |||
$ | |||
Cash outflows: | |||
$ | |||
$ | |||
$ |
b. Determine the net present value of the investment, assuming that the desired rate of return is 15%. 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 | $ |
Amount to be invested | $ |
Net present value | $ |
c. Should Briggs Excavation invest in the
bulldozer, based on this analysis?
, because the bulldozer cost is the present value
of the cash flows at the minimum desired rate of return of 15%.
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
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