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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 |
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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 | |||
Hours of operation | |||
Revenue per hour | |||
Revenue per year | |||
Hours of operation | |||
Fuel cost per hour | |||
Labor cost per hour | |||
Total fuel and labor costs per hour | |||
Fuel and labor costs per year | |||
Maintenance costs per year | |||
Annual net cash flows |
b. Determine the net present value of the investment, assuming that the desired
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?
Yes , because the bulldozer cost is less than 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
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