a | E and T Excavation Company | ||||||||
Equal Annual Net Cash Flow | |||||||||
Cash inflows: | |||||||||
Hours of operation | 4000 | ||||||||
Revenue per hour | X $140 | ||||||||
Revenue per year | 560000 | ||||||||
Cash outflows: | |||||||||
Hours of operation | 4000 | ||||||||
Fuel cost per hour | $28 | ||||||||
Labor cost per hour | 37 | ||||||||
Total fuel and labor costs per hour | X $65 | ||||||||
Fuel and labor costs per year | 260000 | ||||||||
Maintenance costs per year | 40000 | ||||||||
Annual net cash flow | 260000 | ||||||||
b | Present value of annual net cash flows | 1089920 | 260000*PVAF(10 yr, 20%) i.e 4.192 | ||||||
Less amount to be invested | 1111700 | ||||||||
Net present value | -21780 | ||||||||
c | No. Since the net present value is negative, E & T should not invest in Bulldozer. | ||||||||
d | For calculating the number of operating hours such that the present value of cash flows equal | ||||||||
the amount to be invested we need to create an equation by assuming no. of operating hours equal to X hours. | |||||||||
{[($140-$28-$37)per hour*X] - $40,000}*4.192 = Present value of cash flows (equal to amount to be invested) | |||||||||
{[($140-$28-$37)per hour*X] - $40,000} = 1111700*4.192 | |||||||||
X = (265195.6+40000)/75 | |||||||||
X = | 4070 | Hours (Approx) | |||||||
Therefore if the company operates at 4070 hours then the present value of cash flows equals the amount to be invested. |
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