Briggs Excavation Company is planning an investment of $108,600 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $105 per hour for bulldozer work. The bulldozer operator costs $34 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 $45 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

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
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Briggs Excavation Company is planning an investment of $108,600 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for six years. Customers will be charged $105 per hour for bulldozer work. The bulldozer operator costs $34 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 $45 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

Question Content Area

a. Determine the equal annual net cash flows from operating the bulldozer. Use a minus sign to indicate cash outflows.

blankBriggs Excavation CompanyEqual Annual Net Cash Flows
Cash inflows:      
 
  Hours of operation  
 
  X $Revenue per hour  
 
    $Revenue per year
Cash outflows:      
 
  Hours of operation  
 
$Fuel cost per hour    
 
Labor cost per hour    
 
  X $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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a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue).

Learning Objective 3.

Question Content Area

b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. 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 $fill in the blank d6e8f5f69011fe9_1
Amount to be invested $fill in the blank d6e8f5f69011fe9_2
Net present value $fill in the blank d6e8f5f69011fe9_3

c. Should Briggs Excavation invest in the bulldozer, based on this analysis?

 
, because the bulldozer cost is
 
the present value of the cash flows at the minimum desired rate of return of 20%.

 

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.
fill in the blank d6e8f5f69011fe9_6 hours

 
 

 

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