Net Present Value Method—Annuity Briggs Excavation Company is planning an invest

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Net Present Value Method—Annuity

Briggs Excavation Company is planning an investment of $664,200 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for 10 years. Customers will be charged $130 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.

a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.

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b. Determine the net present value of the investment, assuming that the desired rate of return is 6%. 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.

c. Should Briggs Excavation invest in the bulldozer, based on this analysis?
Yes , because the bulldozer cost is less than the present value of the cash flows at the minimum desired rate of return of 6%.

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

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

a.

b.

42360

c. Yes

d.

Briggs Excavation Equal Annual Net Cash Flow Cash inflows: Hours of operation           2,000 Revenue per hour              130 Revenue per year       2,60,000 Cash outflows: Hours of operation           2,000 Fuel cost per hour                41 Labor cost per hour                31 Total fuel and labor costs per hour                72 Fuel and labor costs per year      -1,44,000 Maintenance costs per year        -20,000 Annual net cash flow         96,000

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