A proposed new bus route is expected to require 12 new buses and to operate a to

Question

A proposed new bus route is expected to require 12 new buses and to operate a total of 720,000 vehicle-miles per year (for all 12 buses) and 48,000 vehicle-hours per year (total for all 12 buses). Buses cost $550,000 each, have a 10 year life, and a salvage value after 10 years of $30,000 each. Operating costs include labor costs (wages, benefits, etc) at $75.00 per vehicle-hour, maintenance costs at $1.96 per vehicle-mile, and cost of fuel, oil, tires, etc, at $1.65 per vehicle-mile. (A) Calculate the life cycle cost (net present value) of adding this route and operating it for 10 years using an annual interest rate of 10%. (B) If the bus route saves $20 per rider per trip and the average number of riders is 360 per day (total all buses) for 250 days per year, what is the present value of the benefit for the 10 year life using 10% annual interest rate? (C) What is the benefit to cost ratio for this new bus route and (D) Should the bus route be implemented?

Explanation / Answer

(A)

Net present value of adding vehicle is calculated as under:

B.

Net present value of cost saving as as follows:

c.

Benefit to cost ratio is 128,57,400/ 445,42,726 = 28.87%

D.

No this Bus route should not be accepted.

Buses Cost Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Cash Outflow ($66,00,000) -6199200 -6199200 -6199200 -6199200 -6199200 -6199200 -6199200 -6199200 -6199200 -6199200 ($685,92,000) Cash Inflow 3,60,000 $3,60,000 Life 10 years Required Rate of Return is 10% Present Value factor 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.466 0.424 0.386 $5 Present Value of Cash outflow -66,00,000 -56,35,073 -51,20,539 -46,55,599 -42,34,054 -38,49,703 -34,96,349 -31,80,190 -28,88,827 -26,28,461 -23,92,891 ($446,81,686) Present Value of Cash inflow 0 0 0 0 0 138960 $1,38,960 Net Present value -66,00,000 -56,35,073 -51,20,539 -46,55,599 -42,34,054 -38,49,703 -34,96,349 -31,80,190 -28,88,827 -26,28,461 -22,53,931 445,42,726

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