Reference no: EM132314814

Assignment -

Introduction - Ruby needs to purchase some new vehicles to make local deliveries. Fedex currently has approximately 7,000 vehicles. Historically, Fedex purchased vehicles that ran on conventional energy sources such as gasoline. New technologies have become available, including Compressed Natural Gas (CNG) power trains, electric power trains and technologies to make new vehicle designs that are more fuel efficient.

What is best choice for Fedex and is looking for your input.

CNG - CNG has several appealing qualities. Firstly, local, state and federal tax credits are available for these vehicles. Tax credits directly offset any tax liability. CNG vehicles are also more energy efficient than the conventional gas or diesel vehicles. More importantly, CNG is considered a 'clean' technology. Given the recent attention to climate change and environmental responsibility, CNG would allow FEDEX to differentiate itself from other delivery firms with consumers.

Electric - Like CNG, electric vehicles also have several appealing qualities. Firstly, local, state and federal tax credits are available for these vehicles. Tax credits directly offset any tax liability. Electric vehicles, since they don't consume any gas, are not subject to the same operational cost risk as traditional fossil fuel vehicles when it comes to fuel costs. Electric prices are generally regulated by the government and change more slowly. As with CNG, electric is considered a 'clean' technology.

Redesigned Vehicle - One way to increase the efficiency of the delivery fleet is to use new technologies to improve Fedex's vehicles that use traditional powerplants. Fedex could use more modern materials, such as light way composite materials. For example, these changes could save 1,000 pounds in weight. The vehicles could also utilize newer engine technology, which would reduce engine size, leading to increased efficiency as well.

CNG vehicles have a higher initial cost. There are Federal, (and some) State and Local tax incentives for alternative fuel vehicles and alternative fuel expense.

CNG per gallon is cheaper than both gas and diesel (approx $2.08/gallon currently versus $2.85 for diesel).

There are not many CNG fueling stations in the area.

It takes longer to fuel a CNG vehicle than a traditional gas or diesel vehicle.

Annual Maintenance is somewhat higher.

Electric vehicles have a higher initial cost.

There are Federal, (and some) State and Local tax incentives for alternative fuel vehicles and alternative fuel expense.

Rather than fuel costs, electric vehicles have a cost measured in KW/hour.

To charge in a reasonable amount of time, special charging stations need to be installed, which cost $2,500 per station. Each station works for 2 vehicles.

Because electric vehicles simply charge overnight, there is no fueling time required by the driver.

Annual Maintenance is somewhat lower because less moving parts.

Redesigned vehicles run on gas

They get 40% more MPG than traditional gas vehicles.

They hold 25% less packages than the other vehicles, which means they have shorter routes, which requires more vehicles to deliver the same number of packages.

Take 25% less time to fuel.

Have 35% lower maintenance costs because the new materials are easier to maintain.

Your tax department has instructed you that tax credits should be applied to the purchase price after tax in your costing model prior to calculating depreciation.

You average 252 working days annually.

Use the 7 year MACRS depreciation schedule.

You have a 12% weighted cost of capital (discount rate).

Your company is in a 36.3% tax bracket.

All tax savings are realized in the year they accrue.

There is a 7.5% sales tax on each vehicle type.

Assume delivery of the vehicles would take place at the beginning of 2020.

Assume selection is based on costs over a 10 year period (i.e. vehicle life is 10 years).

Assume vehicles 10% salvage value.

Make models based on yearly time periods (rather than days/months).

Total driver cost, including both wages and benefits, is $62.19 per hour.

In 2018, maintenance costs/mile for the CNG, Electric, Redesigned, Diesel and Gas vehicles were estimated to be $0.2697, $0.1753, $0.1802, $0.2511, and $0.2773 respectively.

Maintenance expenses are projected to increase at 3.5% annually through 2025 and then 4.5% per year after that

Gasoline is expected to cost $3.65 next year, with prices changing 3.75%, 2.15%, 2.45% and 4.25% over the subsequent 4 years with constant prices thereafter.

CNG and Diesel are expected to cost $2.59 and $4.09 per gallon next year, respectively.

Prices of both are expected to change by 8%, 5%, 2%, and 1% over the subsequent 4 years with constant prices thereafter.

Electricity Prices are currently $0.23/KW. These prices are expected to rise by 7% per year for the foreseeable future.

Besides cost differences, expect vehicle choice will affect package volume due to good/bad press.

Any profits/losses from volume changes have tax implications (independent from vehicle costs).

Expect volume changes as follows:

Important: Revenue/cost data only apply to these volume changes.

Decision Time -

1. Based on the collected data, construct cash flow statements for each vehicle. Which of the vehicles would you purchase?

2. Based on your solution to the 1st question, what part of the total cost of each vehicle is the initial cost, fuel costs and other operating expenses? Deduct tax credits where appropriate before your analysis.

3. How much do the tax incentives lower the total costs of CNG and Electric vehicles?

4. How much do the revenue changes impact your decision?