Question

Briggs Excavation Company is planning an investment of $120,100 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for five years. Customers will be charged $115 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.

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 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.

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 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.
hours

Answer 1

Ans:

a)
B Excavation
Equal Annual Net cash Flows
Hours of Operation		2000
Revenue per Hour		115
Revenue Per Year			230000
Cash Outflows
Maintenance Costs per Year
Fuel Cost per Hour	50
Labor Cost per Hour	38
Total Fuel and Labor costs per Hour		88
Fuel and Labor costs per Year(2000*88)		176,000
Maintenance Costs per Year		20,000
Total cash outflow			196,000
Annual net cash Flow			34,000
b)
Present value of cash inflows(3.605*34000)			122570
Less: Amount to be Invest			-120100
Net Present Value			2470
c)Yes Because the Bulldozer cost is less than the present value of cash flows at the minimum desired rate of return of 12%
d)It is approximately 1975 Hours since due to discount factor
PV of Cash Inflows Required		120100
PVAF(12% 5 Years)		3.605
Annual Cash Inflows (120100/3.605)		33315
Add: Annual Maintenance Costs		20000
Total Contribution (required)		53315
Contribution Per Hour(115-38-50)		27
Required Number of Hours		1974.63