A company is considering purchasing a fleet of delivery vans which are available

Question

A company is considering purchasing a fleet of delivery vans which are available with either a diesel or gasoline fueled motor. The gasoline powered van has an initial price of $29,750, the diesel powered one costs $32,250. Both vehicles have a salvage value of $5,000 after 5 years.

The fuel economy of the diesel van is 17MPG, the gasoline powered van achieves 12.5MPG. Both vehicles have a salvage value of $5,000 after 5 years. Both gasoline and diesel are available at $3.59 per gallon. The company uses 20% for MARR (Minimal Accepted Rate of Return).

If the company plans to use the vans to run 75,000 miles per year, what is the IRR (Incremental Rate of Return) on the incremental investment?

Explanation / Answer

Electric Vehicles From 2010 onwards, increasing numbers of electric vehicles, including buses and commercial vehicles, will be phased into transport plans around the world. Development and improvement of battery technology is leading to a wide range of options coming to the market in 2011: some are already here. While some manufacturers explore fuel cell technology, the emphasis will be on electric/hybrid for the coming decade as we transition away from petroleum as a source of energy. However battery-powered vehicles are forecast to make up less than 2.5% of the world's fleet in 2015. There are currently 880 million vehicles on the roads, with 98% gas powered contributing 40% of the planet's greenhouse gases. The problem. American vehicles make up only 30% of the cars in use globally, they are responsible for almost half of the GHGs emitted by vehicles. In the U.S. alone, autos emit more than 333 million tons of carbon dioxide (CO2) each year, while consuming about 44% of oil use. Of roughly 250 million vehicles on US roads, about 55% are classified as automobiles: 92% of US households own at least one car. In Britain, a report by the Royal Academy of Engineering lays out the reality of turning some of Britain's 30 million cars electric in coming decades. They conclude that the challenges are do-able but also pretty daunting. link Latest news : June 2012: First Tesla Model S hit the road: 10,000 pre-ordered. link _______________________________________________ Below Ford & Tesla - likely leaders in mass production Battery charging advances Overview of the electric car market Batteries and the role lithium plays & other technology The role being played by Asia Commercial vehicles & buses Shai Agassi's "Better Place" development Selection of electric models Hydrogen fuel-cell development Tesla & Ford - likely leaders in mass production Ford, with the Focus model, will quite possibly lead the breakthrough in acceptance of electric vehciles, challenging the Nissan Leaf. (For other challengers in the market, see "Selection" lower down.) Tesla could be a serious market success later this year also.) Tesla may be the company that makes the breakthrough on electric cars for the masses. In one way, it is not a car-maker in the traditional sense, but more like a company such as Apple - starting from scratch, with a product not based on conventional gas-engine vehicles. So, different completely from the Nissan Leaf or Volt. There have been huge risks, but staying with a plan that required first the expensive roadster to provide funding, it is coming closer to reality. As batteries become cheaper, and gas prices stay high, transition time for electric vehicles is getting within sight. Time to look more closely at Tesla, and Elon Musk. Over the course of several years, Tesla sold about 2,400 Roadster sports cars. The company is planning to produce about 6,000 Model S cars (pictured at right) in 2012 and scale up to 20,000 in 2013. These numbers are not large for a big carmaker -- Toyota sells more Camrys in a month than Tesla plans to sell in a year. Still, for an automotive startup, they seem heroic. Tesla's Model S presents a confusing test case. It's a stylish, high-performance car, with a battery pack that gives it greater range (between 160 and 300 miles before recharging, depending on the model) than any other electric car. And EVs like Tesla's seem to be evolving at an astonishing rate. If batteries get 50% better, it will put EVs on an even playing field with gas cars. Between the time Tesla produced the Roadster and Model S, the batteries have improved by about 40%. When Musk was asked if it's possible that Tesla could fail to sell 20,000 Model S cars annually, he says that it already has more than 8,000 preorders. And Tesla does not advertise, does not give discounts, and has never given any test-drives. Word has spread virally. link

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