Net Present Value Method—Annuity Briggs Excavation Company is planning an investment of $474,400 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for seven years. Customers will be charged $140 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% 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. Use a minus sign to indicate cash outflows. Briggs Excavation Company Equal Annual Net Cash Flows Cash inflows: Hours of operation fill in the blank 0e564d031f94f97_2 Revenue per hour X $fill in the blank 0e564d031f94f97_4 Revenue per year $fill in the blank 0e564d031f94f97_6 Cash outflows: Hours of operation fill in the blank 0e564d031f94f97_8 Fuel cost per hour $fill in the blank 0e564d031f94f97_10 Labor cost per hour fill in the blank 0e564d031f94f97_12 Total fuel and labor costs per hour X $fill in the blank 0e564d031f94f97_14 Fuel and labor costs per year fill in the blank 0e564d031f94f97_16 Maintenance costs per year fill in the blank 0e564d031f94f97_18 Annual net cash flows $fill in the blank 0e564d031f94f97_20 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 5f079000af9dfc4_1 Amount to be invested $fill in the blank 5f079000af9dfc4_2 Net present value $fill in the blank 5f079000af9dfc4_3 c. Should Briggs Excavation 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 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 5f079000af9dfc4_6 hours

Net Present Value Method—Annuity Briggs Excavation Company is planning an investment of $474,400 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for seven years. Customers will be charged $140 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% 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. Use a minus sign to indicate cash outflows. Briggs Excavation Company Equal Annual Net Cash Flows Cash inflows: Hours of operation fill in the blank 0e564d031f94f97_2 Revenue per hour X $fill in the blank 0e564d031f94f97_4 Revenue per year $fill in the blank 0e564d031f94f97_6 Cash outflows: Hours of operation fill in the blank 0e564d031f94f97_8 Fuel cost per hour $fill in the blank 0e564d031f94f97_10 Labor cost per hour fill in the blank 0e564d031f94f97_12 Total fuel and labor costs per hour X $fill in the blank 0e564d031f94f97_14 Fuel and labor costs per year fill in the blank 0e564d031f94f97_16 Maintenance costs per year fill in the blank 0e564d031f94f97_18 Annual net cash flows $fill in the blank 0e564d031f94f97_20 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 5f079000af9dfc4_1 Amount to be invested $fill in the blank 5f079000af9dfc4_2 Net present value $fill in the blank 5f079000af9dfc4_3 c. Should Briggs Excavation 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 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 5f079000af9dfc4_6 hours

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Net Present Value Method—Annuity

Briggs Excavation Company is planning an investment of $474,400 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for seven years. Customers will be charged $140 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%
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. Use a minus sign to indicate cash outflows.


Briggs Excavation Company
Equal Annual Net Cash Flows
Cash inflows:
Hours of operation		fill in the blank 0e564d031f94f97_2
Revenue per hour		X $fill in the blank 0e564d031f94f97_4
Revenue per year			$fill in the blank 0e564d031f94f97_6
Cash outflows:
Hours of operation		fill in the blank 0e564d031f94f97_8
Fuel cost per hour	$fill in the blank 0e564d031f94f97_10
Labor cost per hour	fill in the blank 0e564d031f94f97_12
Total fuel and labor costs per hour		X $fill in the blank 0e564d031f94f97_14
Fuel and labor costs per year			fill in the blank 0e564d031f94f97_16
Maintenance costs per year			fill in the blank 0e564d031f94f97_18
Annual net cash flows			$fill in the blank 0e564d031f94f97_20

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 5f079000af9dfc4_1
Amount to be invested	$fill in the blank 5f079000af9dfc4_2
Net present value	$fill in the blank 5f079000af9dfc4_3

c. Should Briggs Excavation 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 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 5f079000af9dfc4_6 hours

Expert Solution

Step 1

Annual net cash flow means the difference between cash inflow and cash outflow for the given period.

Net present value Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Present value is calculate using discount factor.

Requirement a

a)
B Excavation
Equal Annual Net cash Flows
Cash inflows
Hours of Operation		2,000
Revenue per Hour	x	$140
Revenue Per Year			$280,000
Cash Outflows
Hours of Operation		2000
Fuel Cost per Hour	$34
Labor Cost per Hour	$26
Total Fuel and Labor costs per Hour		$60
Fuel and Labor costs per Year(2000*66)			($120,000)
Maintenance Costs per Year			($20,000)
Annual net cash Flow [ 280,000 -120,000-20,000 ]			$140,000

Requirement b

Determination of the net present value of investment assuming desired rate of return as 20%:

Present value of annual net cash flows = annual net cash inflows x present value of annuity of $1 at 20% for 7 years

= $140,000 x 3.605

= $504,700

b)
Present value of cash inflows(3.605*140,000)	$ 504,700
Less: Amount to be Invested	$ (474,400)
Net Present Value	$ 30,300

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