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
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
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 10E: Net present value methodannuity Jones Excavation Company is planning an investment of 125,000 for a...
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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 |
|||||
| 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
Transcribed Image Text:Cash outflovs:
Hours of operation v
1,000
Fuel cost per hour
15
Labor cost per hour v
30 V
Total fuel and labor costs per hour v
45
Fuel and labor costs per year v
45,000
Maintenance costs per year v
7,500 V
Annual net cash flows v
37,500
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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
142,163
Amount to be invested
125,000
Net present value
17,163 V
c. Should Jones invest in the bulldozer, based on this analysis?
Yes v , because the bulldozer cost is less than v 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
Transcribed Image Text:Net Present Value Method-Annuity
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
5.582
4.868
4.564
4.160
3.605
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 inflovs:
Hours of operation v
1,000
Revenue per hour v
90 V
Revenue per year v
90,000
Cash outflows:
Hours of operation v
1.000
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