Adams County has 80 older model school buses that carry a present salvage value of $15,000 each. The county officials are contemplating replacing all the buses with 70 new larger ones, each costing $115,000. Larger size of the buses coupled with planned routing and schedule changes indicate that the service quality will not be sacrificed when the number of buses in operation is reduced.
The busses operate 250 days per year and the average travel distance per bus is 50 miles per day (same for both the old fleet and the new fleet).The new buses’ fuel efficiency is rated at 8 mpg whereas the current fleet is providing 6 mpg.Fuel is assumed to cost an average of $3.50/gallon.
Other non-people related annual operating costs (like insurance, oil change etc.) are estimated to be $7,000 per vehicle per year for the new fleet and $8,500 per vehicle per year for the existing older fleet.
The new fleet is expected to last 12 years, at which time they will be replaced for an expected salvage of $9,000 per vehicle. The current fleet can be made to last for 12 years with the assumption that there will be a one-time makeover at the end of 4 years at a cost of $40,000 per vehicle.
The county uses Cost of capital (MARR) of 5%. Determine the Present Value of replacing the fleet. In computing this, do not ignore the savings realized because of better gas mileage and lower maintenance costs of new buses. Because the analysis is for county, taxes and depreciation are not relevant.
: In doing this problem consider the situation as two mutually exclusive alternatives – keep the old fleet or buy the new fleet. Capture all the relevant cash flows for each alternative and convert them to present value. Keep in mind that when you look at “keep the existing fleet” alternative, you are foregoing an opportunity (a cost) to raise cash by selling the buses now. So the Net Present Value of replacement is the difference between the two present values – and that is what the Adams County should look at before making a decision.