Question

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.
Determine the equal annual net cash flows from operating the bulldozer.

Answer 1

Answer:

net cash flows = $37,500 per year

Explanation:

initial investment $125,000

operate 1,000 hours per year for 5 years

price per hour $90

direct labor costs $30 per hour

direct materials (fuel) $15 per hour

annual maintenance $7,500

the annual cash flows from operating the bulldozer = [($90 (price per hour) - $45 (total variable costs per hour) x 1,000 hours] - $7,500 (annual maintenance cost) = $45,000 - $7,500 = $37,500 per year

the cash flows should be the same for years 1 through 5.