Present value of costs and the present value of savings

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Reference no: EM131222559

A university with a fleet of 50 buses is considering a conversion of those vehicles from diesel power to compressed natural gas (CNG). Each of these buses travels 20,000 miles per year and the university would like to save money on fuel. Your job is to analyze the decision to understand how long it will take for the initial investment to pay off. To perform the analysis, use the information of the different costs between the two options listed below. (A) CNG option: Capital Costs: Bus engine conversion: $7000/bus Recurring Costs: Bus engine overhaul: $4000/bus (at 10 and 20 years) CNG: $1,000,000 (annually) (B) Status quo: Recurring Costs: Diesel fuel: $2,500,000 (annually) Plot the present worth of each option for each year (n = 0 to 10), assuming that the discount rate is 0.08 and using the year end convention. When does the cost of the conversion pay off? Clarification: First, calculate the present value of all costs of the conversion, including downstream costs, whenever they occur. Assume we must have money now to invest at i so we can pay for these single payments later. Second, calculate the present value of all savings from year zero to year n. Finally, compare the present value of costs and the present value of savings (Psav = f(n)). When Psav(n) > Pcost, then you’ve paid for the conversion.

Reference no: EM131222559

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