Domestic services: Long term decision-making

The Service Manager of Domestic Services has put up a proposal to the board that the

company should provide vans to their five service engineers, rather than pay them a

mileage allowance for using their own cars. The vans would be equipped with online

communications technology. The advantage of the equipped vans is that the engineers

could be deployed more efficiently in response to customers requests and could also save

time by carrying a wider range of spares than in their own cars.

The vans would cost 14,500 each and would trade in for 4,200 each after three years.

Running costs, excluding depreciation, are reliably estimated at 75 per week, per van. At

present the mileage costs per engineer is 225 miles per week, continuing for 50 weeks in

the year. The companys mileage allowance is currently 40 pence per mile.

Service is charged to customers at 25 per hour. Provision of the vans would enable each

engineer to carry out three extra hours of chargeable servicing per week.

You wish to evaluate the proposal using the following techniques:

Net present value

Internal rate of return

Payback

The companys cost of capital is 7%.