Question

Jones Excavation Company is planning an investment of $125,000 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $90 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $7,500. The bulldozer uses fuel that is expected to cost $15 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.

Jones Excavation Company
Equal Annual Net Cash Flows
Cash inflows:
		× $
			$
Cash outflows:
	$
		× $
			$

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 table above. Round to the nearest dollar.

Present value of annual net cash flows	$
Amount to be invested
Net present value	$

c. Should Jones 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 10%.

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

Answer 1

Answer with working is given below

1000 $90 $90,000 Jones Excavation Company Equal Annual Net Cash Flows Cash Inflows Hours of Operation Revenue per hour Total Revenue Less: Cost of Operation Operator cost per hour Fuel cost Total cost per hour Total cost of operation per year Annual maintenance cost Annual cash inflow $30 $45,000 $7,500 $37,500 b) $142,163 Present value of Annual cash inflows PV factor at 10% for 5 years - 3.791 Amount to be invested Net Present value $125,000 $17,163 c) Since NPV is positive investment should be made d) Number of Operating hours Operating hours = Annual cash flow + maintenance cost (Revenue per hour-Variable cost per hour) Annual cash flow $125,000 3.7910 $32,973 Operating hours Annual Cash flow + maintenance cost (Revenue per hour-VC per hour) 899.40 hours $40,473 $45 Operating hours = 899 hours