Question

Bob Tate is the director of strategy for a small truck delivery company. The company operates a fleet of 100 trucks. Of these, 36 trucks will need to be replaced this year. Bob has two choices, either diesel or green trucks. The following are the facts for each possibility:

For EACH diesel truck: Cost = $175K; life, 3 years (the trucks lose value quickly after 3 years of operations as the mileage reaches 200K); salvage value at end of three years, $50K; annual operating costs, $90K.

For EACH green truck: Cost = $220K; life, 4 years; salvage value at end of four years, $100K; annual operating costs, $75K.

Which choice should Bob make, diesel or green if the cost of capital is 10%; you may assume that the time period covered by this decision is 12 years IF you wish, and you can ignore the other 64 of the 100 trucks in the fleet? (Ignore taxes, depreciation, and ignore diversification.)

Answer 1

Calculation of PV of cost of diesel truck-

Year	Initial cost	Operating Cost	Salvage value	Total Cost	PV factor @10%	PV of total cost
0	175	-	-	175	1	175
1	-	90	-	90	0.909090909	81.82
2	-	90	-	90	0.826446281	74.38
3	-	90	-50	40	0.751314801	30.05
Total Cost						361.25

In 12 years span total truck required = 12/3 = 4

Total cost of trucks = Cost per truck*No. of truck required

= 361.25*4 = $1445

Calculation of PV of cost of green truck-

Year	Initial cost	Operating Cost	Salvage value	Total Cost	PV factor @10%	PV of total cost
0	220	-	-	220	1	220
1	-	75	-	75	0.909090909	68.18
2	-	75	-	75	0.826446281	61.98
3	-	75	-	75	0.751314801	56.35
4	-	75	-100	-25	0.683013455
Total Cost						406.51

In 12 years span total truck required = 12/4 = 3

Total cost of trucks = Cost per truck*No. of truck required

= 406.51*3 = $1219.54

Hence the cost of green trucks are less in comparison of diesel truck in the span of 12 years, so Bob should buy green trucks.