The transport planner within a bus company has two proposed new routes for which there will...

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The transport planner within a bus company has two proposed new routes for which there will be practically the same customer demand. The planner can only afford to proceed with one of the proposed routes. The cost details for the two proposed routes are given below: Route 1: No. of medium-sized buses required: 6. (The buses will operate for a total of 600,000 vehicle-kilometres per year and 20,000 vehicle-hours per year.) Economic life of the bus (after which a new bus to be purchased): 7 years Purchase cost: £150,000 per bus, payable immediately Operating costs: £50 per vehicle-hour Maintenance costs: £0.10 per vehicle-kilometre Fuel costs: £0.75 per vehicle-kilometre Salvage Value per bus after 7 years: £60,000 Route 2: No. small-sized buses required: 10. (The buses will operate for a total of 500,000 vehicle-kilometres per year and 25,000 vehicle-hours per year.) Economic life of the bus (after which a new bus to be purchased): 5 years Purchase cost: £60,000 per bus, payable immediately Operating costs: £20 per vehicle-hour Maintenance costs: £0.15 per vehicle-kilometre Fuel costs: £0.75 per vehicle-kilometre Salvage Value per bus after 5 years: £30,000 Annual costs are payable at the end of each year of operation. Assuming an interest rate of 5%: a) calculate the total cost (excluding salvage value), in present terms, associated with Route 1 over a single 7-year cycle. b) based on capitalised costs, which route should the planner choose? You must show all your working in arriving at your answer. The transport planner within a bus company has two proposed new routes for which there will be practically the same customer demand. The planner can only afford to proceed with one of the proposed routes. The cost details for the two proposed routes are given below: Route 1: No. of medium-sized buses required: 6. (The buses will operate for a total of 600,000 vehicle-kilometres per year and 20,000 vehicle-hours per year.) Economic life of the bus (after which a new bus to be purchased): 7 years Purchase cost: £150,000 per bus, payable immediately Operating costs: £50 per vehicle-hour Maintenance costs: £0.10 per vehicle-kilometre Fuel costs: £0.75 per vehicle-kilometre Salvage Value per bus after 7 years: £60,000 Route 2: No. small-sized buses required: 10. (The buses will operate for a total of 500,000 vehicle-kilometres per year and 25,000 vehicle-hours per year.) Economic life of the bus (after which a new bus to be purchased): 5 years Purchase cost: £60,000 per bus, payable immediately Operating costs: £20 per vehicle-hour Maintenance costs: £0.15 per vehicle-kilometre Fuel costs: £0.75 per vehicle-kilometre Salvage Value per bus after 5 years: £30,000 Annual costs are payable at the end of each year of operation. Assuming an interest rate of 5%: a) calculate the total cost (excluding salvage value), in present terms, associated with Route 1 over a single 7-year cycle. b) based on capitalised costs, which route should the planner choose? You must show all your working in arriving at your answer.

Answer rating: 100% (QA)

SOLUTION a Calculations for total cost excluding salvage value of Route 1 over 7 years Purchase cost ... View the full answer