ACCT-256 Lecture Notes - Lecture 3: European Route E94, European Route E95
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alue LO 16-2
Callaghan Company is considering investing in two new vans thatare expected to generate combined cash inflows of $27,500 per year.The vansâ combined purchase price is $99,000. The expected life andsalvage value of each are seven years and $20,000, respectively.Callaghan has an average cost of capital of 12 percent. (PV of $1and PVA of $1) (Use appropriate factor(s) from the tablesprovided.) |
Required |
a. | Calculate the net present value of the investment opportunity.(Negative amount should be indicated by a minus sign. Roundintermediate calculations and final answer to 2 decimalplaces.)
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b-1. | Indicate whether the investment opportunity is expected to earna return that is above or below the cost of capital. | ||||
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b-2. | Based on youranswer in Requirement b-1, should the investment opportunity beaccepted. | ||||
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E & T Excavation Company is planning an investment of$357,800 for a bulldozer. The bulldozer is expected to operate for1,000 hours per year for seven years. Customers will be charged$140 per hour for bulldozer work. The bulldozer operator costs $26per hour in wages and benefits. The bulldozer is expected torequire annual maintenance costing $10,000. The bulldozer uses fuelthat is expected to cost $34 per hour of bulldozer operation.
Present Value of an Annuity of $1 atCompound 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 | 3.352 | 2.991 |
6 | 4.917 | 4.355 | 4.111 | 3.784 | 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 flowsfrom operating the bulldozer.
E and TExcavation Company | |||
Equal AnnualNet Cash Flow | |||
Cash inflows: | |||
Hours of operation | |||
Revenue per hour | X $ | ||
Revenue per year | $ | ||
Cash outflows: | |||
Hours of operation | |||
Fuel cost per hour | $ | ||
Labor cost per hour | |||
Total fuel and labor costs perhour | X $ | ||
Fuel and labor costs peryear | |||
Maintenance costs peryear | |||
Annual net cash flow | $ |
Feedback
a. Subtract the operating expenses (hourly fuel and labor costs,multiplied by the operating hours, plus the annual maintenancecosts) from the revenues (operating hours multiplied by the hourlyrevenue).
Learning Objective 3.
b. Determine the net present value of theinvestment, assuming that the desired rate of return is 10%. Usethe present value of an annuity of $1 table above. Round to thenearest dollar. If required, use the minus sign to indicate anegative net present value.
Present value of annual net cash flows | $ |
Less amount to be invested | $ |
Net present value | $ |
c. Should E & T invest in the bulldozer,based on this analysis?
No
d. Determine the number of operating hours suchthat the present value of cash flows equals the amount to beinvested. Round interim calculations and final answer to thenearest whole number.
hours
Feedback
b. Multiply the annual net cash flow by the present value of anannuity factor and subtract the amount to be invested.
c. Which is more favorable?
d. Set up an equation to solve for hours.
Net Present Value Method Annuity
E & T Excavation Company is planning an investment of $620,100 for a bulldozer. The bulldozer is expected to operate for 3,000 hours per year for seven years. Customers will be charged $140 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 $30,000. The bulldozer uses fuel that is expected to cost $39 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 | 3.352 | 2.991 |
6 | 4.917 | 4.355 | 4.111 | 3.784 | 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.
E and T Excavation Company | |||
Equal Annual Net Cash Flow | |||
Cash inflows: | |||
$ | |||
$ | |||
Cash outflows: | |||
$ | |||
X $ | |||
$ |
b. Determine the net present value of the investment, assuming that the desired rate of return is 20%. Use the present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.
Present value of annual net cash flows | $ |
Less amount to be invested | $ |
Net present value | $ |
c. Should E & T 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. Round interim calculations and final answer to the nearest whole number.
hours