Briggs Excavation Company is planning an investment of $132,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours

Briggs Excavation Company is planning an investment of $132,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours per year for five years. Customers will be charged $110 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 $8,000. The bulldozer uses fuel that is expected to cost $46 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 present value of an annuity of $1 table in the chapter (Exhibit 2). Round to the nearest dollar.

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

d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested.


Answer:

a. Cash inflows: 

Hours of operation…………………………………… 
 × Revenue per hour……………………………………  $   110 
 Revenue per year………………………………………   $165,000 


Cash outflows:    
 Hours of operation………………………………………  1,500  
 Fuel cost per hour………………………………… $46   
 Labor cost per hour………………………………… 
× Total fuel and labor costs per hour…………… 
Fuel and labor costs per year…………………………  (111,000) 
Maintenance costs per year…………………………    (8,000) 
Annual net cash flow…………………………………  $  46,000 
b. Annual net cash flow (at the end of each of five years)………… $  46,000 
× Present value of annuity of $1 at 10% for five periods…………   3.791 
Present value of annual net cash flows……………………………  $174,386 
Less amount to be invested…………………………………………   132,000 
Net present value……………………………………………………… $  42,386 
c. Yes. Briggs should accept the investment because the bulldozer cost is less 
than the present value of the cash flows at the minimum desired rate of return 
of 10%. 
d. 3.791 [(Hrs.  × $110) – (Hrs. × $74) – $8,000] = $132,000 
(Hrs. × $417) – (Hrs. × $281) – $30,328 = $132,000 
Hrs. × $136 = $162,328 
Hrs. = 1,194 (rounded) 
Thus, the bulldozer operating hours must exceed 1,194 annually in order for 
the investment to be justified.