) A public school district is investigating whether to purchase a new school bus
ID: 2550462 • Letter: #
Question
) A public school district is investigating whether to purchase a new school bus to take over the rural-most route in the district. They have two options:
A modern, eco-friendly bus complete with seat belts and air conditioning, will have a first cost of $95,000, cost savings (in terms of fuel efficiency and maintenance costs) of $20,000/year the first year, and decreasing by $1000 per year thereafter (so $19,000 the second year, 18,000 the third year, etc…). It’s estimated that the salvage value will be $8,000 at the end of its 20 year life.
A more basic bus will have a first cost $70,000, cost savings of $14,000 per year decreasing by $500 per year each year thereafter (so $13,500 the second year, $13,000 the third year, etc.).It is estimated that the salvage value will be $5000 at the end of its 20-year life.
Assume that the school district also has the option to stay with their current fleet (so the do nothing option is also available).
A) Use Benefits to Costs analysis to determine which of the options, if any, would be most economical for the school district if their MARR is 5%.
B) Compute the value of X- i.e., the first cost of the modern bus- that makes the two alternatives in this example equally desirable:
Modern
Basic
Cost
X
$70,000
Uniform annual benefit
$20,000 in year 1, decreasing by $1000/year thereafter
$14,000 in year 1, decreasing by $500/year thereafter
Salvage value
$8000
$5000
C) In this problem only the economic consequences were evaluated. Do you think this type of decision is only economic, or are there other factors that could/would/should be considered? Briefly discuss…
(if using excel please post code)
Modern
Basic
Cost
X
$70,000
Uniform annual benefit
$20,000 in year 1, decreasing by $1000/year thereafter
$14,000 in year 1, decreasing by $500/year thereafter
Salvage value
$8000
$5000
Explanation / Answer
Modern Bus
Basic bus
B.
In order to make both the alternatives equally desirable, the Net Present Value(NPV) from the alternatives should be equal
Present value of cash inflow - PV of Cash outflow
153820-X = 57151
X = 96669
Year Cash Inflow PVF @ 5% Present Value 0 -95000.00 1 -95000.00 1 20000.00 0.952 19040.00 2 19000.00 0.907 17233.00 3 18000.00 0.864 15552.00 4 17000.00 0.823 13991.00 5 16000.00 0.784 12544.00 6 15000.00 0.748 11220.00 7 14000.00 0.711 9954.00 8 13000.00 0.677 8801.00 9 12000.00 0.645 7740.00 10 11000.00 0.614 6754.00 11 10000.00 0.585 5850.00 12 9000.00 0.557 5013.00 13 8000.00 0.530 4240.00 14 7000.00 0.505 3535.00 15 6000.00 0.481 2886.00 16 5000.00 0.458 2290.00 17 4000.00 0.436 1744.00 18 3000.00 0.416 1248.00 19 2000.00 0.396 792.00 20 9000.00 0.377 3393.00 NPV 58820.00Related Questions
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