Net Present Value Method-Annuity E &T; Excavation Company is planning an investm
ID: 2476181 • Letter: N
Question
Net Present Value Method-Annuity E &T; Excavation Company is planning an investment of $332,000 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for seven years. Customers will be charged $115 per hour for bulldozer work. The bulldozer operator costs $29 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 $38 per hour of bulldozer operation Present Value of an Annuity of $1 at Compound Interest 12% 0.943 0.909 0.893 1.690 2.673 2.487 2.402 15% 0.870 1.626 2.283 3.4653.170 3.037 2.855 3.352 3.784 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Year 696 10% 1.833 1.736 4 4.212 3.791 3.605 4.917 4.355 4.111 5.582 4.8684.564 6.210 5.335 4.968 6.802 5.7595.328 7.360 6.145 5.650 8 10Explanation / Answer
Answer a E and T Excavation Company Equal Annual Net Cash Flow Cash Inflows Hours of operation 2000 Revenue per hour $115 Revenue per year $2,30,000 Cash Outflows Hours of operation 2000 - Fuel cost per hour $38 - Labour cost per hour $29 Total Fuel and labour cost per hour $67 Fuel and Labour cost per year $1,34,000 Maintenance cost per year $20,000 Annual Net Cash flow $76,000 Answer b PV Factor at 15% for 7 years = 4.160 Present value of annual net cash flow = $76000 * 4.160 = $3,16,160 Less amount to be invested $3,32,000 Net present value -$15,840 Answer c Based on above analysis , E & T should not invest in bulldozer as NPV is negative. Answer d Assume X be annual net cash flow Present value of annual net cash flow - amount invested = 0 (X * 4.160) - 332000 = 0 X = 332000 / 4.160 = 79808 Hence required annual net cash flow = $79808 Extra annual net cash flow required = $79808 - $76000 = $3808 Contribution margin per hour = Revenue per hour - variable cost per hour = $115 - $67 = $48 Hence required extra hours = Extra annual net cash flow / Contribution margin per hour = $3808 / $48 = 79 hours Hence no.of operating hours required so that Present value of annual net cash flow equals the amount to be invested = 2000 hours + 79 hours = 2079 hours