Retail customers expected BPS to keep their stores fully-stocked during critical selling seasons. To do that, BPS’s supply chain depended on its fleet of delivery trucks and tractors. During the recession, the company had delayed normal truck replacement to conserve cash flow. But recently the economy has is doing pretty well, and the VP-Operations recognized the fleet’s age was driving higher maintenance costs that ate into margins and sometimes impacted deliveries. The increasing fleet average age was driving growing maintenance costs, increased fuel costs, and a deteriorating retail image. BPS was also under pressure by one large customer to improve its environmental record, and the company was concerned they could lose this key customer if they continued to ignore the pressure. Further, the EPA had mandated new pollution control standards for the 2022 model year, which dramatically reduced tailpipe emissions. BPS’s older trucks and tractors did not use any of this clean technology. The fleet consisted of a mix of over the road tractors pulling large-capacity, 40-foot trailers that were optimal for large deliveries to retail distribution centers, and smaller, all purpose-built trucks designed to deliver live product from nursery to retail outlets. The VP-Operations proposed replacement of a significant part of the fleet, including some large-scale tractor-trailers and some mid-size delivery vehicles. After reviewing the offerings of several major suppliers, he had chosen a Swedish supplier with proven emissions technology whose trucks and road tractors were all “Made in the USA”. The supplier had quoted a package consisting of seven new over-the-road tractors @ $95,000 each, and six mid-size delivery trucks which sold for $72,000 each, plus a $11,000 custom body-building fee per truck. The truck bodies would be sized to handle the new retail display racks described in Proposal C) above. As a sweetener, the supplier agreed to handle all routine maintenance for these new trucks and tractors for a flat fee of $45,000 per year. The VP-Ops estimated that the new fleet purchases could reduce fuel consumption, increase mileage per gallon and reduce maintenance costs by $430,000 per year over the estimated 6-year useful life of the equipment. The company is not anticipating much salvage value for the trucks and tractors beyond this period. 1)Perform a Payback Period and Discounted cash flow(NPV) analysis for the above project and also determine the internal rate of return .
Retail customers expected BPS to keep their stores fully-stocked during critical selling seasons. To do that, BPS’s supply chain depended on its fleet of delivery trucks and tractors. During the recession, the company had delayed normal truck replacement to conserve cash flow. But recently the economy has is doing pretty well, and the VP-Operations recognized the fleet’s age was driving higher maintenance costs that ate into margins and sometimes impacted deliveries. The increasing fleet average age was driving growing maintenance costs, increased fuel costs, and a deteriorating retail image. BPS was also under pressure by one large customer to improve its environmental record, and the company was concerned they could lose this key customer if they continued to ignore the pressure. Further, the EPA had mandated new pollution control standards for the 2022 model year, which dramatically reduced tailpipe emissions. BPS’s older trucks and tractors did not use any of this clean technology.
The fleet consisted of a mix of over the road tractors pulling large-capacity, 40-foot trailers that were optimal for large deliveries to retail distribution centers, and smaller, all purpose-built trucks designed to deliver live product from nursery to retail outlets.
The VP-Operations proposed replacement of a significant part of the fleet, including some large-scale tractor-trailers and some mid-size delivery vehicles. After reviewing the offerings of several major suppliers, he had chosen a Swedish supplier with proven emissions technology whose trucks and road tractors were all “Made in the USA”. The supplier had quoted a package consisting of seven new over-the-road tractors @ $95,000 each, and six mid-size delivery trucks which sold for $72,000 each, plus a $11,000 custom body-building fee per truck. The truck bodies would be sized to handle the new retail display racks described in Proposal C) above. As a sweetener, the supplier agreed to handle all routine maintenance for these new trucks and tractors for a flat fee of $45,000 per year. The VP-Ops estimated that the new fleet purchases could reduce fuel consumption, increase mileage per gallon and reduce maintenance costs by $430,000 per year over the estimated 6-year useful life of the equipment. The company is not anticipating much salvage value for the trucks and tractors beyond this period.
1)Perform a Payback Period and Discounted cash flow(
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