Question

Net Present Value Method Annuity

E & T Excavation Company is planning an investment of $1,758,500 for a bulldozer. The bulldozer is expected to operate for 4,000 hours per year for 10 years. Customers will be charged $150 per hour for bulldozer work. The bulldozer operator costs $29 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $40,000. The bulldozer uses fuel that is expected to cost $38 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 10%. 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

Answer 1

Answer:

a) E & T Excavation company

Calculation of equal annual net cash flow (Amount in $)

Operating Hours per year	4,000 hours
Cash Inflows :
Charged from customer ($150 per hour*3,000 hrs)	450,000
Cash Outflows :
Bulldozer Operating costs ($29 per hour*3,000 hrs)	(87,000)
Bulldozer Fuel costs ($38 per hour*3,000 hrs)	(114,000)
Annual maintenance cost	(40,000)
Equal annual net Cash flow	209,000

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