A company is considering its fleet of delivery vans. Two options are available,

Question

A company is considering its fleet of delivery vans. Two options are available, both concerning the same vehicle. It can buy a gasoline or diesel powered model. Both vehicles have a salvage value of %5,000 after five years of use. The diesel powered van costs $39,000 and the gasoline powered one $34,000. They have fuel economies of 11mpg and 7mpg respectively. Gasoline is expected to have an average price of $2.25 per gallon, diesel $2.35 per gallon. The company uses 17.5% for MARR (minimal accepted rate of return).

Calculate the breakeven annual mileage for the two vans.

If the company plans to run the vans for an average annual mileage of 90,000 miles, what is the incremental rate of return for the diesel compared to the gasoline model?

PLEASE SHOW ALL WORK AND EQUATIONS USED TO GET FINAL ANSWERS.

Explanation / Answer

n our day to day life, each individual is always presented the dilemma of which of two or more alternatives is the best solution to a problem. The same life’s problem is encountered by businesses, power generators and users of fuels and energy resources – which is more economical – using an old diesel engine to generate electricity or to convert to dual fueling with diesel/fuel oil and natural gas fuel or purchase a new diesel engine capable of running on dual fuels such as diesel/fuel oil and the cheaper natural gas. Your energy technology expert has modified his reciprocating engine model to run on multiple fuels such as gasoline, diesel, biofuels, fuel oils, biogas, landfill gas or natural gas. The author prepared three identical worksheets to calculate the generation, fuel consumption, capital and operating costs, income and cash flow to determine the price of generated electricity given the capital cost and fuel costs for each alternative: Main1 worksheet – this is the base case using diesel/bunker fuel and determines the price of generated electricity to achieve the equity returns of say 15% p.a. Main2 worksheet – this is the alternative case using natural gas mainly and some diesel for shutting down the engine and uses the price of generated electricity found in Main1 worksheet. Incremental worksheet – this performs the incremental analysis. It calculates the incremental investments and incremental cash flow arising from changes in fuel costs, operating costs and other balance sheet items. It then calculates the resulting net present value (NPV) and the discounted cash flow internal rate of return (DCF IRR) given the equity/debt structure. Report worksheet – this summarizes the incremental income statement, incremental balance sheet and incremental cash flow statement. This model is perfectly suited for those justifying the purchase of new equipment to change obsolete or in-efficient equipment with a newer and more energy-efficient equipment, or fuel conversion studies such as converting from vehicles using gasoline to LPG, LNG or CNG fuel in gasoline engines, vehicles using diesel to LPG, LNG or CNG, or large reciprocating diesel engines for power generation that is being converted or replaced in order to run with natural gas.

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