Net Present Value Method—Annuity Jones Excavation Company is planning an investment of $125,000 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $90 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $7,500. The bulldozer uses fuel that is expected to cost $15 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. Jones Excavation Company Equal Annual Net Cash Flows Cash inflows: Hours of operation fill in the blank 77d238f1dfce03f_2 Revenue per hour × $fill in the blank 77d238f1dfce03f_4 Revenue per year $fill in the blank 77d238f1dfce03f_6 Cash outflows: Hours of operation fill in the blank 77d238f1dfce03f_8 Fuel cost per hour $fill in the blank 77d238f1dfce03f_10 Labor cost per hour fill in the blank 77d238f1dfce03f_12 Total fuel and labor costs per hour × $fill in the blank 77d238f1dfce03f_14 Fuel and labor costs per year fill in the blank 77d238f1dfce03f_16 Maintenance costs per year fill in the blank 77d238f1dfce03f_18 Annual net cash flows $fill in the blank 77d238f1dfce03f_20 Feedback a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue). b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 table above. Round to the nearest dollar. Present value of annual net cash flows $fill in the blank 53e0ea043ff1037_1 Amount to be invested fill in the blank 53e0ea043ff1037_2 Net present value $fill in the blank 53e0ea043ff1037_3 c. Should Jones 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 10%. 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 hours

Net Present Value Method—Annuity Jones Excavation Company is planning an investment of $125,000 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $90 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $7,500. The bulldozer uses fuel that is expected to cost $15 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. Jones Excavation Company Equal Annual Net Cash Flows Cash inflows: Hours of operation fill in the blank 77d238f1dfce03f_2 Revenue per hour × $fill in the blank 77d238f1dfce03f_4 Revenue per year $fill in the blank 77d238f1dfce03f_6 Cash outflows: Hours of operation fill in the blank 77d238f1dfce03f_8 Fuel cost per hour $fill in the blank 77d238f1dfce03f_10 Labor cost per hour fill in the blank 77d238f1dfce03f_12 Total fuel and labor costs per hour × $fill in the blank 77d238f1dfce03f_14 Fuel and labor costs per year fill in the blank 77d238f1dfce03f_16 Maintenance costs per year fill in the blank 77d238f1dfce03f_18 Annual net cash flows $fill in the blank 77d238f1dfce03f_20 Feedback a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue). b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 table above. Round to the nearest dollar. Present value of annual net cash flows $fill in the blank 53e0ea043ff1037_1 Amount to be invested fill in the blank 53e0ea043ff1037_2 Net present value $fill in the blank 53e0ea043ff1037_3 c. Should Jones 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 10%. 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 hours

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 10E: Net present value methodannuity Jones Excavation Company is planning an investment of 125,000 for a...

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Net Present Value Method—Annuity

Jones Excavation Company is planning an investment of $125,000 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $90 per hour for bulldozer work. The bulldozer operator costs $30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $7,500. The bulldozer uses fuel that is expected to cost $15 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.

Jones Excavation Company
Equal Annual Net Cash Flows

Cash inflows:
Hours of operation		fill in the blank 77d238f1dfce03f_2
Revenue per hour		× $fill in the blank 77d238f1dfce03f_4
Revenue per year			$fill in the blank 77d238f1dfce03f_6
Cash outflows:
Hours of operation		fill in the blank 77d238f1dfce03f_8
Fuel cost per hour	$fill in the blank 77d238f1dfce03f_10
Labor cost per hour	fill in the blank 77d238f1dfce03f_12
Total fuel and labor costs per hour		× $fill in the blank 77d238f1dfce03f_14
Fuel and labor costs per year			fill in the blank 77d238f1dfce03f_16
Maintenance costs per year			fill in the blank 77d238f1dfce03f_18
Annual net cash flows			$fill in the blank 77d238f1dfce03f_20

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a. Subtract the operating expenses (hourly fuel and labor costs, multiplied by the operating hours, plus the annual maintenance costs) from the revenues (operating hours multiplied by the hourly revenue).

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present value of an annuity of $1 table above. Round to the nearest dollar.

Present value of annual net cash flows	$fill in the blank 53e0ea043ff1037_1
Amount to be invested	fill in the blank 53e0ea043ff1037_2
Net present value	$fill in the blank 53e0ea043ff1037_3

c. Should Jones 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 10%.

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 hours

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