1) A transportation company (Transvan) operates a fleet of 1000 vans with a fleet average fuel economy (FAFE) of 20 miles per gallon (mpg). On the average, each of these vans travels 25,000 miles per year, and is expected to be in service for 5 years. With the escalating price of fuel, the company decided to entertain a proposal from a vendor to equip the fleet with patented fuel saving kits that are guaranteed to increase FAFE by 20% in one version (MOD-A) and 30% in another version (MOD-B). The vendor’s installed cost, including full maintenance for 5 years, is $2850 per van for MOD-A and $4000 per van for MOD-B. Transvan’s annual MARR is 14% and the additional profit due to fuel savings is exempt from income taxes (i.e., there is no need to account for depreciation and income taxes). The current fuel cost (Year 0) is $3.60 per gallon but it is expected to increase gradually in $0.15 per gallon increments in each of the 1st, 2nd, 3rd, 4th, and 5th years after kit installation. The kits have no salvage value at the end of their 5-year life.
a. Perform a DCFA and estimate the IRR and NPW for both MOD-A and MOD-B, and an incremental DCFA for MOD-B over MOD-A.
b. Do you expect multiple values (roots) of IRR? Why?
c. Which option (MOD-A or MOD-B) yields a higher IRR?
d. Should Transvan proceed with MOD-A, MOD-B or neither?