Question

15. According to a recent press release, the UPS fleet includes more than 2,000 alternative fuel vehicles, in addition to its traditional fossil fuel truck lines. These alternative fuel vehicles deliver to homes and businesses every day alongside their traditional fuel counterparts. The alternative fleet includes compressed natural gas, propane-powered, hybrid electric, electric, liquefied natural gas, hydraulic hybrid, and fuel cell vehicles. This fictional problem outlines possible considerations. UPS has decided to replace a diesel-powered truck line in its fleet with electric hybrid drive train Class 5 trucks for environmental reasons (not cost savings). UPS has a choice between an Electric Vehicles International (EVI) electric hybrid and a similar truck manufactured by Efficient Drivetrains, Inc. (EDI). The EVI truck costs $130,000; saves $3,000 in fuel costs per year compared to the diesel truck; has a useful life of 4 years; and can be salvaged at a price of $30,000 (based on estimates for the price of a 4-year-old electric hybrid truck). The EDI truck costs $140,000; saves $4,000 in fuel costs per year; has a useful life of 5 years; and can then be salvaged at a price of $20,000 (based on estimates for the price of a 5-year-old electric hybrid truck). UPS depreciates its trucks according to 5-year MACRS, uses a WACC of 15% for ground transportation projects, and has a tax rate of 35%, working capital is unaffected by truck replacement. Assume inflation is 0% Which electric hybrid truck should UPS optimally select? Base your decision on an EAC analysis and assume the EAC for EDI is 27,093 a. EAC(EVI) 27,003 < EAC(EDI) 27,093, EVI is preferred b. EAC(EVI) 25,853 EAC(EDI) 27,093; EVI is preferred с. EAC(EVI-30,961 > EAC(EDI)-27,093; EDI is preferred d. EAC(EVI)-28,415 EAC(EDI) 27,093, EDI is preferred

Answer 1

EVI Trucks:	0	1	2	3	4	5
Initial cost	-130000
After tax savings on fuel costs (3000*65%)		1950	1950	1950	1950
Depreciation		26000	41600	24960	14976	14976	7488	130000
Tax shield on depreciation at 35%		9100	14560	8736	5242
After tax salvage value [30000-(30000-22464)*0.35]					27362			22464
Net after tax annual cash flows	-130000	11050	16510	10686	34554
PVIF at 15%	1	0.86957	0.75614	0.65752	0.57175	2.85498
PV at 15%	-130000	9609	12484	7026	19756
NPV	-81125
EAC = 81125/2.85498 =	-28415
EDI Trucks:	0	1	2	3	4	5
Initial cost	-140000
After tax savings on fuel costs (4000*65%)		2600	2600	2600	2600	2600
Depreciation		28000	44800	26880	16128	16128	8064	140000
Tax shield on depreciation at 35%		9800	15680	9408	5645	5645
After tax salvage value [20000-(20000-8064)*0.35]						15822
Net after tax annual cash flows	-140000	12400	18280	12008	8245	24067
PVIF at 15%	1	0.86957	0.75614	0.65752	0.57175	0.49718	3.35216
PV at 15%	-140000	10783	13822	7895	4714	11966
NPV	-90820
EAC =102786/3.35216 =	-27093
ANSWER: OPTION [d] EAC(EVI) 28,415>EAC(EDI) = 27093: EDI IS PREFERRED.