Question

Net Present Value Method Annuity E &T Excavation Company is planning an investment of $386,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for five years. Customers will be charged $120 per hour for bulldozer work. The bulldozer operator costs $26 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 $34 per hour of bulldozer operation. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.909 0.893 0.943 0.870 0.833 2 1.833 1.736 1.690 1.528 1.626 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 5 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 4.160 5.582 4.868 4.564 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 Cash outflows: O

Answer 1

a	E and T Excavation Company
	Equal Annual Net Cash Flow
	Cash inflows:
	Hours of operation		2000
	Revenue per hour		X $120
	Revenue per year			240000
	Cash outflows:
	Hours of operation		2000
	Fuel cost per hour	$26
	Labor cost per hour	34
	Total fuel and labor costs per hour		X $60
	Fuel and labor costs per year			120000
	Maintenance costs per year			20000
	Annual net cash flow			100000
b	Present value of annual net cash flows	379100	100000*PVAF(5 yr, 10%) i.e 3.791
	Less amount to be invested	386700
	Net present value	-7600
c	No. Since the net present value is negative, E & T should not invest in Bulldozer.
d	For calculating the number of operating hours such that the present value of cash flows equal
	the amount to be invested we need to create an equation by assuming no. of operating hours equal to X hours.
	{[($120-$26-$34)per hour*X] - $20,000}*3.791 = Present value of cash flows (equal to amount to be invested)
	{[($120-$26-$34)per hour*X] - $20,000}   = 386700/3.791
	X   = (102004.75+20000)/60
	X               =	2033	Hours (Approx)
	Therefore if the company operates at 2033 hours then the present value of cash flows equals the amount to be invested.