Question 1 The management of a private transportation company is interested in reducing the carbon footprint of their company by replacing several old trucks. These include four (4) Class 8 Volvos, thirteen (13) on-highway Volvo trucks, and twenty-seven (27) Freightliners. The company may either replace the ageing trucks with new ones of the same kind OR replace them with electric Semi trucks from Tesla.
The first alternative involves scrapping all old trucks and purchasing forty-four (44) new Volvo and Freightliners models and planting 150,000 trees (to offset carbon usage).
The second option involves scrapping all old trucks and purchasing thirty-one (31) Tesla models along with related equipment.
The table below shows the revenue and expense predictions:
Description Alternative 1 Alternative 2
Machinery/related equipment $2,580,000 $1,750,000
Annual revenues due to the new trucks $2,400,000 $2,260,000
Annual labour cost $234,000 $385,000
Annual O&M cost $790,000 $650,000
CCA Rate 24.4% 24.4%
Project life 15 years 15 years
Salvage value $350,000 $460,000
The management team believes that various investment opportunities available for the company will guarantee at least a rate of return on investment (MARR) of at least 9.5%. The marginal tax rate is 21%. Due to uncertainty, some input variables may vary from the base cases presented in the above table. The following variabilities in estimates should be considered:
Variable Minimum Maximum
Revenues -15% +20%
Labour Cost -35% +10%
O&M Cost -5% +30%
Assume that each of these variables can independently deviate from its base value.
c] If Alternative 1 is chosen over Alternative 2, identify all possible scenarios in which Alternative 1 is better than Alternative 2. What is probability that this decision correct?