PROBLEM II

Present value method

Wu Construction Company is planning an investment of $140,000 for a bulldozer. The bulldozer is expected to operate for 1,200 hours per year for five years. Customers will be charged $75 per hour for bulldozer work. The bulldozer operator is paid an hourly wage of $24 per hour. The bulldozer is expected to require annual maintenance costing $4,000. The bulldozer uses fuel that is expected to cost $15 per hour of bulldozer operation.

A. Determine the equal annual net cash flows from operating the bulldozer.

B. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present values of an annuity of $1 in the chapter.

C. Should Wu Construction Company invest in the bulldozer, based on this analysis?