Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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
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:      
Hours of operation       
Revenue per hour       
Revenue per year       
Cash outflows:      
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       
 
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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      
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

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
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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 Feedback 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
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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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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