5. In 2005 GE released its Evolution Series locomotive engine. Estimated fuel savings were roughly 1,000,000 gallons per year. At the time of its release, GE and other competitors were selling numerous locomotives priced near $2 million.
a) What is the reference price for the Evolution Series locomotive engine?
b) If diesel is priced at $3.50 per gallon, what is the value of fuel savings of the GE Evolution Engine in the first year alone?
c) Based on fuel savings for the first year alone, what is the total value of the GE Evolution Engine?
d) If Union Pacific operates locomotives for 20 years and uses a discount rate of 8%, what is the present value of the fuel savings? (Hint: use the =PV formula in Excel)
e) Based on the fuel savings over 20 years what is the differential value of a GE Evolution Engine? What is the total value?
f) Where would you price this engine? Is that reasonable considering the reference price?