The owner of an airport shuttle business currently leases a small fleet of gasoline fueled midsize busses that he currently spends $645,000 annually to lease, fuel, & maintenance costs. He is very interested in switching to busses that operate on alternative fuels due to the large potential savings on fuel cost. He estimates that the new busses would reduce his fuel & maintenance expense to $375,000 annually and if he purchases new busses, his lease cost would go away.
Currently his business serves 25,000 passengers per year, a number that has been stable for a while and that he does not anticipate will change significantly over the next five years. So over the next five years, he estimates his cumulative volume will be 125,000 passengers (25,000 passengers/ year *5). To replace the fleet of busses with alternative fuel vehicles would require a lump sum investment of $1,150,000 and he estimates that the life of the new busses would be five years before they needed to be replaced.
Ignoring the time value of money, show all supporting work and make recommendations as to whether he should or should not replace his current leased busses by purchasing alternative fuel busses.