Question

Many citizens of Grayville Township travel each work day between Grayville and a nearby city, Megametropolis. To reduce the need for building more lanes on the freeway and to comply with local sustainability policies, the township has decided to establish an express bus service that uses environmentally friendly fuel. Grayville plans to charge $1.25 for a one-way fare.
Township managers want to purchase either a 32 or 52 passenger bus. Following are data for the buses.


During the four hours of “rush hour” traffic each day, all buses would be in service and expected to operate at full capacity (township regulations prohibit bus passengers from standing). The buses would make six round trips during these periods. For the other 16 hours of operation, about 500 passengers are expected to ride the buses, and only four buses would cover the route. Part-time drivers would be used for the extra time during rush hours. A bus traveling the route all day would go 480 miles, and one traveling only during rush hours would go 120 miles per day during the 260 work days each year.

REQUIRED
A. Prepare a schedule for the estimated annual revenues for each alternative.
B. Prepare a schedule for the estimated annual drivers’ wages for each alternative.
C. Prepare a schedule for the annual cost of fuel for each alternative.
D. Assuming that Grayville requires a minimum rate of return of 12%, calculate the net present value of each bus option. Ignore inflation and taxes.
E. List two business risks that could affect this decision.
F. Based on your preceding analyses, which type of bus should the city purchase? Explain your reasoning.
G. Suppose an editorial in the Grayville newspaper argued that the township should not launch the bus service because it would harm the environment by encouraging more people to move into Grayville and then commute to Megametropolis. Furthermore, the editorial claimed that there are no environmentally friendly fuels; any fuel used would cause environmental damage. Evaluate the reasonableness of thesearguments.


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  • CreatedJanuary 26, 2015
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