Chapter 12, Problem 10E

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.

1. a. Determine the equal annual net cash flows from operating the bulldozer.
2. 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 table appearing in Exhibit 5 of this chapter. Round to the nearest dollar.
3. c. Should Jones invest in the bulldozer, based on this analysis? Explain.
4. d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested. Round all calculations to whole numbers.