E & T Excavation Company is planning an investment of $425,700 for a bulldozer.

Question

E & T Excavation Company is planning an investment of $425,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for eight years. Customers will be charged $140 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.

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.

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

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

Explanation / Answer

Solution:

B) At 2033 Hours, the present value of cash flows equals the amount to be invested.

Assumptions Initial Investment 425700 Hours of Operation 2000 Charge/ Hour 140 Annual Revenue 280000 Annual Maintenance 20000 Wages and Benefits 38 Annual Wages and Benefits 76000 Fuel /Hour 50 Annual Fuel Costs 100000 Discount Rate 12%

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