Monday, November 9, 2009

Key Factors to Consider in the Decision Whether to Own Trucks

Key Factors to Consider in the Decision Whether to Own Trucks

When deciding whether to own trucks, there are many factors to be considered. Here are some of the factors that must be taken into consideration:

The project to be considered involves a fleet of trucks with an engineering life of 3 years (that is, the trucks will usually be totally worn out after 3 years). However, if the trucks were taken out of service, or "abandoned," prior to the end of 3 years, they would have a positive salvage value.

Here are the estimated net cash flows for each truck:
Initial Investment=$60,000

End-of-Year net:

Year and Operating Cash Flow
0 $(60,000)
1 $25,200
2 $24,000
3 $21,000

Year and Abandonment Cash Flow
0 $60,000
1 $37,200
2 $24,000
3 $0

The relevant cost of capital is 10%.

a. What would the Net Present Value (NPV) be if the trucks were operated for the full 3 years?
$ (1,478.59) For Full 3 Years

b. What if they were abandoned at the end of Year 2?
NPV = -$60,000 + $25,200/(1.10)1 + $24,000/(1.10)2 + $24,000/(1.10)2
$ 2,578.51 For Abandonment at end of Year 2

c. What if they were abandoned at the end of Year 1?
NPV = -$60,000 + $25,200/(1.10)1 + $37,200/(1.10)1
$ (3,272.73) For Abandonment at end of Year 1

d. What is the economic life of the truck project?
The economic life of the truck project is 2 years, as opposed to an engineering life of 3 years.

Of course, the way you operate your fleet can make a huge difference in the engineering life of your trucks. For instance, dedicating trucks to certain runs, with a limited number of people that drive each truck, will usually result in a longer engineered life for your trucks.

There are many other factors to be considered in the decision whether to own trucks, including the amount of hours each day you keep the trucks productive.

In addition to the basic calculations above, be sure to include all direct and indirect costs associated with the ownership option.

Some other costs of vehicle ownership include:

1. Opportunity costs associated with using company working capital.
2. Maintenance expenses.
3. If you operate your own maintenance facility:
- Fixed costs associated with fleet maintenance facilities, shop equipment, etc.
- Carrying costs of fuel, parts and tire inventories.
4. Vehicle washing, lettering, painting, etc.
5. Accident administration, safety, insurance.
6. Fleet information system and computer costs.
7. Supplies, uniforms, postage, etc. for the fleet department.
8. Rental or substitute vehicle expenses.
9. Fuel costs (if deciding to purchase fuel through the lessor).
10. Anticipated proceeds from vehicle sale.
11. You should also apply an allocated cost for fleet administration, including:
Costs to renew fleet permits.
Auditing and controlling of fuel, tires, and parts inventories.
Fuel and parts procurement time.
Vehicle acquisition and specification time.
Forms administration (pre-trip inspection, driver inspection reports, etc.).
Personal property and other tax administration.
Title, licensing and registration time.
State inspection monitoring.
Adherence to DOT and EPA regulations.



  2. It would have been nice if you would have attributed the article to me when you posted it on your blog.
    Pat Ryan

  3. Please remove this post from your blog.
    Pat Ryan

  4. Please delete this article from your blog.

  5. 2/9/2015

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