Question

Net Present Value Method—Annuity

Briggs Excavation Company is planning an investment of $65,200 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $105 per hour for bulldozer work. The bulldozer operator costs $37 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 $48 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	3.353	2.991
6	4.917	4.355	4.111	3.785	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 Company
Equal Annual Net Cash Flows
Cash inflows:
		X $
			$
Cash outflows:
	$
		X $
			$

b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. 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 20%.

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

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Answer 1

a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.
Year	No Of Hours	Rate per hour	Total Inflows(A x B)	Operating costs	Total Operating costs	Annual maintainance	Fuel costs	Total Fuel costs	Total Outflows	Net Cash flows
	(A)	(B)		per hour ( c)	(A x C)=1	-2	Per hour (D)	(A XD) =3	1+2+3=4	Income-costs
1	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
2	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
3	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
4	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
5	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
6	2000	105	210000	-37	-74000	-20000	-48	-96000	-190000	20000
b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. 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.
Total Net cash inflows per year	20000
Annuity Factor at 20% for 6 years	3.326
Present value of cash inflows	66520
Present value of cash outflows	65200
Net present value	1320
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 20%.
Answer	Yes. Because the Net present value is positive, investment in the above scenario is advisable. Because Present value
	of cash inflows are greater than present value of cash outflows
	(At 20% Annuity factor)