Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Adams County has 9 8 older model school buses that carry a salvage value ( today ) of $ 7 . 6 0 0 each.

Adams County has 98 older model school buses that carry a salvage value (today) of $7.600 each. The county officials are contemplating replacing all the buses with 90 new larger ones, each costing $130,000.
If the county decides to keep the existing fleet, it will need to spend an additional $11,000 per bus to refurbish them. Half of the existing fleet will be refurbished immediately, and the other half at the end of 1st year.
Project Life: 10 years
Bus Operations:
The busses operate (on the average)300 days per year.
Average travel distance: Existing Fleet 43 miles/day/bus. New Fleet 46 miles/day/bus.
Fuel Efficiency: Existing buses 7.2 mpg, new buses 10.5 mpg.
Fuel Price: Fuel is assumed to cost an average of $4.00/gallon in the 1st year and escalate at 6% per year.
Manpower:
Driver wages are a major cost item. Other cost items are negligible and are not provided.
Current Fleet: Requires 92 drivers each working an average of 4 hours/day for 300 days.
New Fleet: Requires 84 drivers each working an average of 4 hours per day for 300 days.
Driver wages: $20/hour in the 1st year and escalating at 4% per year
Routine Bus Maintenance:
Routine Maintenance costs (like insurance, oil change etc.) is estimated to be:
$9,000 per year per bus for the existing fleet.
$8,000 per year per bus for the new fleet.
The maintenance costs are expected to escalate at 4% per year.
Bus Repair Costs
Bus repair costs include irregular items not covered by warranty like repair of exhaust systems, brakes etc.
$2,000 per year per bus for the existing fleet for the 1st year, escalating at 5% per year
$0 per year per bus for the new fleet for first 5 years (covered by 5-year warranty), followed by $1,000 for the 6th year. Afterwards it is expected to grow at 5% per year.
Salvage Value:
The expected salvage value at the end of the project life:
New bus = $13,000 each. Existing Bus = $0 each.
The county uses Cost of Capital (MARR)(i.e., interest rate) of 7%.
Determine:
Net Present Value of keeping the existing fleet.
Net Present Worth of acquiring the new fleet.
Difference in Net Present Value of (New Old) fleet.
Difference in Net Annual Value of (New Old) fleet.
Write a brief that includes evaluation of the two alternatives. Even though your brief will focus on financial results, use your knowledge and imagination to include non-financial factors in your brief. Keep the brief concise less than half page. I am not looking for a lengthy discussion.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Reporting And Statement Analysis A Strategic Perspective

Authors: Clyde P. Stickney, Paul Brown

4th Edition

0030238110, 978-0030238116

More Books

Students also viewed these Finance questions

Question

1. Have a 2-week arrangement; then evaluate.

Answered: 1 week ago