E & T Excavation Company is planning an investment of $177,100 for a bulldozer. The bulldozer is expected to operate for 3,000 hours per year for 10 years. Customers will be charged $110 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 $30,000. 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.
E and T Excavation Company | |||
Equal Annual Net Cash Flow | |||
Cash inflows: | |||
X $ | |||
$ | |||
Cash outflows: | |||
$ | |||
X $ | |||
$ |
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 | $ |
Less amount to be invested | $ |
Net present value | $ |
c. Should E & T invest in the bulldozer,
based on this analysis?
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
a.
cash inflows: | |||
Hours of operation | 3000 | ||
Revenue per hour | 110 | ||
Revenue per year | $330000 | ||
Cash outflows: | |||
Hours of operation | 3000 | ||
Fuel cost per hour | 50 | ||
Labor cost per hour | 38 | ||
Total fuel and labor cost per hour | 88 | ||
Fuel and labor cost per year | 264000 | ||
Maintenance cost per year | 30000 | ||
Annual net cash flow | $36000 |
b.
Present value of annual net cash flows |
$36000*5.019 = $180684 |
Less: Amount to be invested |
$177100 |
Net present value |
$3584 |
c. E & T should invest in the bulldozer because it has positive Net present value.
d. Number of operating hours = 177100/5.019 = 35286 hours
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