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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Net present value method—annuity

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.

  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 of $1 table in the chapter (Exhibit 5). Round to the nearest dollar.
  3. c. Should Briggs 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.

a.

To determine

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The net cash flow of Company BE.

Explanation

The net cash flow of Company BE is as follows:

Initial investment = $132,000

Cash flows from capital investment (bulldozer) of Company BE
Particulars $  $
Cash inflows during the year (A) (1)   165,000
Less: Cash outflows
Fuel and labor costs per year (2)   111,000
Maintenance cost per year       8,000
Total cash outflows (B)   119,000
Annual net cash flow (A-B)     46,000

Table (1)

Hence, annual cash flow of Company BE is $46,000.

Working note:

1

b.

To determine

To calculate: The net present value of the investment of Company BE.

c.

To determine

To analysis: Whether the Company BE should invest in the bulldozer or not.

d.

To determine
The number of operating hours that is equal to the amount of investment.

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