Question

Briggs Excavation Company is planning an investment of $132,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours per year for five years. Customers will be charged $110 per hour for bulldozer work. The bulldozer operator costs $28 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $8,000. The bulldozer uses fuel that is expected to cost $46 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 Determine the equal annual net cash flows from operating the bulldozer. Determine the net present value of the investment, assuming that the desired rate of return is 10%.

Answer 1

Solution and Explanation:

The yYearly Equal Cash Inflows =
`(110-44-28) * 1500-8000` = 46000

Present Value of Inflows at the rate of 10% =
`$46000 * \text { PVIFA( } 5 \text { years }, 10 \%)$`= 46000 multiply with 3.791 = 174386

NPV = 174386 minus 132500 = 42386

Briggs must make an investment in the project as it generates additional wealth and NPV is positive

For NPV = 0, PV of inflows = 132500

PV Of Inflows = Annual Cash Flow multiply with 3.791

Annual Cash Flow = 132500 divide by 3.791 = 34951.20

So, Hours =
`(34951.20+8000) /(110-46-28)` = 1193.08 hours