Question

Company X needs 50 passenger cars to use in field operations. It has to decide between purchasing these vehicles (as assets on the company balance sheet) and performing their services and meeting their needs by renting. There are 20 people in the company who can work as drivers in these vehicles, and if they go to purchase, they must employ an additional 40 drivers. The monthly wages of the current 20 employees are 3000 TL per person, and it plans to give minimum wage to new drivers. The turnkey purchase price of the cars is 120.000 TL per vehicle and for this, credit can be used as well as with own funds. In case of using credit, there is a monthly interest payment of 0.80%. If the vehicles in question go to rent; 30 vehicles are rented as drivers, and 20 vehicles are rented, as 20 drivers currently employed in the company will not be employed elsewhere, but will only be employed in driving those vehicles. 30 vehicles can be rented for 5000 TL per vehicle including driver, 20 vehicles for 2500 TL per driver. The rental period is 3 years.

Related to vehicles; Tax and similar expenses, fuel, maintenance and repair costs belong to X Company completely in both alternatives.

QUESTION: Which of the alternatives of renting and purchasing vehicles should be preferred by Company X, why?

Answer 1

We can find out comparable costs for all elements of purchasing and renting and compare to find out the optimal course of action.

Let us first look at purchasing vehicles and its components

• Purchase Price per car = 120,000. Total Price for 50 cars = 120,000*50 = 6,000,000 = Over a 3 year period this can be split as 6000000/36 per month = 166,666 per month
• Additional Drivers = 40. Monthly Wages per person = 3000. Hence Monthly Wage Expenses =  120,000 per month
• Total Expenses per month = 286,666

In case of renting

• Vehicles with drivers = 30. Cost per vehicle+driver = 5000. Total Cost = 5000*30 = 150,000 per month.
• Vehicles without drivers = 20. Cost per vehicle = 2500. Total Cost = 2500*20 = 50,000 per month
• Total expenses per month = 200,000

Note that the cost of 20 employees who are already there will not be different across the two cases.

Over a 3 year period - if the entire depreciation for the cars is accounted for within this period - then clearly the renting option would be better because of the significantly lower monthly costs.