Question

Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $35,000. The object is to save on horse transporter rentals. Marsh had been renting a transporter every other week for $200 per day plus $1.00 per mile. Most of the trips are 80 or 100 miles in total. Marsha usually gives her driver, Joe Laminitis, a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $0.45 per mile. Insurance costs for Marsha’s transporter are $1,200 per year. The transporter will probably be worth $15,000 (in real terms) after eight years, when Marsha’s horse Spike, will be ready to retire. Is the transporter a positive-NPV investment? Assume a nominal discount rate of 9% and a 3% forecasted inflation rate. Marsha’s transporter is a personal outlay, and not a business or financial investment, so taxes can be ignored. (Use excel & excel functions)

Answer 1

We will perform a scenario analysis to understand the implications on the NPV

First we need to make the following assumption:

The distance travelled in each trip = 80 miles

The second assumption is that there are 26 trips in each year

Now consider the scenario where she rents the horse transporter every other week

Rents the Horse Transporter
	1	2	3	4	5	6	7	8
Miles	80	80	80	80	80	80	80	80
Cost per mile	1.0	1.0	1.1	1.1	1.1	1.2	1.2	1.2
Fixed Cost	200.0	206.0	212.2	218.5	225.1	231.9	238.8	246.0
Tip	40.0	41.2	42.4	43.7	45.0	46.4	47.8	49.2
Cost Per Trip	320.0	329.6	339.5	349.7	360.2	371.0	382.1	393.6
Yearly Cost	8,320	8,570	8,827	9,091	9,364	9,645	9,935	10,233
Net Cost (NPV)	55,055.30

cost per trip is calculated as = Fixed cost + Miles * Cost per mile + tip

Yearly Cost = 26 * Cost per trip

Now consider the scenario, where she buys the horse transporter

Buys the Horse Transporter
	1	2	3	4	5	6	7	8
Variable	36	37	38	39	41	42	43	44
Insurance	1,200	1,236	1,273	1,311	1,351	1,391	1,433	1,476
Net Cash Expense	37,136	2,200	2,266	2,334	2,404	2,476	2,550	(12,373)
Net Cost (NPV)	40,928.87

Cost = Insurance + Variable cost * 26

The NPV of the case of buying the transporter is lower than the case of renting it.

Since the NPV indicates cost in this case, we will prefer the scenario when she buys the transporter