Net Present Value Method$-$Annuity

Jones Excavation Company is planning an investment of $$284,800$ for a bulldozer. The bulldozer is expected to operate for $1,000$ hours per year for seven years. Customers will

be charged $$140$ per hour for bulldozer work. The bulldozer operator costs $$28$ per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing

$$10,000.$ The bulldozer uses fuel that is expected to cost $$37$ per hour of bulldozer operation.

Present Value of an Annuity of $$1$ at Compound Interest

a$.$ Determine the equal annual net cash flows from operating the bulldozer.

Jones Excavation Company

Equal Annual Net Cash Flows

b$.$ Determine the net present value of the investment, assuming that the desired rate of return is $12\%.$ 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

Amount to be invested

$$2$

$296,660$

$284,800$

$$11,860$

Net present value

c$.$ Should Jones invest in the bulldozer, based on this analysis?

Ye $,$ because the bulldozer cost is less than $$ the present value of the cash flows at the minimum desired rate of return of $12\%.$

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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T Check My Work

Multiply the annual net cash flow by the present value of an annuity factor and subtract the amount to be invested.

c$.$ Which is more favorable?

Set up an equation to solve for hours.