A suburban taxi company is considering buying taxis with diesel engines instead of gasoline engines. The cars average 50,000 km a year, with a useful life of 4 years for the taxi with the gas engine and 5 years for the diesel taxi. Other comparative information is as follows:
Diesel Gasoline
Vehicle cost $24000 $19000
Fuel cost per liter $0.68 $0.72
Mileage, in km/liter 35 28
Annual repairs $ $900 $700
Annual insurance premiums $1000 $1000
End-of-useful-life resale value $4000 $6000
Useful life 5 years 4 years
Use an annual cash flow analysis to determine the more economical choice if interest is 6%.
Let us take each case one by one
Case 1: Taxi Company buys Diesel Taxi
Intial Vehicle Cost = $24,000
Average distance covered per year= 50,000
Mileage in Km/liter= 35
Therefore liter of diesel required per year = 50,000/35= 1428.57
Fuel Cost per Liter = $0.68
Therefore yearly fuel cost= 1428.57 * 0.68 = $971.43
Annual Repair = $900
Annual Insurance Premium = $1,000
Resale Value after useful life of 5 years = $4,000
So, other than initial vehicle cost, diesel taxi's annual expenses are ($971.43+ $900+ $1000)= $2,871.43
Benefit of selling at year 5 is $4000
Since, interest rate is 6%, discount factor for each year are
Year 0 = 1/(1+0.06)^0 = 1
Year 1= (1.1.06)^1= 0.9434
Year 2= (1/1.06)^2 = 0.8900
Year 3= (1/1.06)^3 = 0.8396
Year 4= (1/1.06)^4 = 0.7921
Year 5= (1/1.06)^5 = 0.7473
So Total Cost for Diesel Taxi is 24,000 + 2871.43 *(0.9434+0.8900+0.8396+0.7921+0.7437) -4,000*0.7473 = $33,106.47
Annual Cashflow will be total cost divided by 5 - (33,106.47)/5= $6,621.29
Case 2: Taxi Company buys Gasoline Taxi
Intial Vehicle Cost = $19,000
Average distance covered per year= 50,000
Mileage in Km/liter= 28
Therefore liter of diesel required per year = 50,000/28= 1785.71
Fuel Cost per Liter = $0.72
Therefore yearly fuel cost= 1785.71 * 0.72 = $1,285.71
Annual Repair = $700
Annual Insurance Premium = $1,000
Resale Value after useful life of 4 years = $6,000
So, other than initial vehicle cost, gasoline taxi's annual expenses are ($1,285.71+ $700+ $1000)= $2,985.71
Benefit of selling at year 4 is $6,000
Discount for Year 1 to Year 4 are shown above. We will use same.
So Total Cost for Gasoline Taxi is 19,000 + 2985.71 *(0.9434+0.8900+0.8396+0.7921) -6,000*0.7921 = $24,593.25
Annual Cashflow will be total cost divided by 4 - (24,593.25)/4= $6,148.31
Since, Annual Cash flow of Gasoline Taxi ($6,148.31) is lesser than that of Desel Taxi ($6,621.29), Gasoline Taxi is more economical choice.
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A suburban taxi company is considering buying taxis with diesel engines instead of gasoline engines. The...