bob johnson ntea presentation
TRANSCRIPT
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Mak ing Inves t m ent Dec isions
Using Vehic le L i fe-c yc le CostAnalys is
Presented by:
Bob Johnson
Director of Fleet RelationsNational Truck Equipment Association
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The financial analysis concepts andtechniques utilized in this presentation
are based on Generally AcceptedAccounting Principles (GAAP) asestablished by the American Institute of
Certified Public Accountants.
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What is L i fe -c yc le CostAnalys is?
A financial analysis technique thattakes into account the total cash flows
associated with a business scenarioover the total life of that scenario
When properly applied it can be a excellenttool for evaluating business investmentalternatives Including the utilization ofhybrid and alternative fueled trucks
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Conc ept vs . App l ic a t ion
Widely accepted in concept
Actual application is more limited
More often than not results aresuspect due to a failure to accuratelyidentify and account for all applicablecash flows
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Appl ic a t ion t o Hybr ids andAl t e rna t ive Fue l Truc k s
As early adopters of these systemsyou are helping to develop thetechnology
Long term potential for cost savings
Social & Environmental responsibilities
Current projects are subsidized by governmentand business
Ultimately, in order to besustainable, these technologies
must pay for themselves
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Ret urn o f Inves t m ent vs.Ret urn on Invest m ent
Many so called life cycle cost studies try todetermine how long it will take to recoveran investment (total or incremental) on a
dollar for dollar basis
This approach fails to recognize the time
value of money A dollar 5 years in the future is worth less than a
dollar in hand today
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Ret urn o f Inves t m ent vs.Ret urn on Invest m ent
This means that when making a lifecycle cost analysis future cash flowsmust be discounted to reflect their
Present Value
The discount (interest) rate used when
determining the present value of afuture sum varies
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Ret urn o f Inves t m ent vs.Ret urn on Invest m ent
For a business the discount rate may be: The businesss weighted cost of debt and equity
(minimum acceptable rate)
Alternative opportunity costs (greater thanminimum)
An arbitrary rate determined by management
For a government entity the rate may be: The weighted cost of all bonded indebtedness
The bond rate for a specific project
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The Tim e Va lue o fMoney
At any given internal rate of return (discountrate) greater than zero, $1 in hand today isworth more than $1 at some point in the future
Todays value of $1 at some givenfuture point is know as the PresentValue (PV)
Present Value
PV = Fn/ (1+r)n
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Net Present Va lue
The sum of a series of related presentvalues associated with any givenscenario is known as the Net Present
Value (NPV)
If the net present value of a life cycle
cost analysis is equal to or greaterthan zero the scenario being evaluatedis earning at or above the desired rateof return
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What Should be Inc luded ina L i fe-c yc le Cost Analys is?
Primary cost and revenue components
Secondary cost and revenuecomponents
Financial components
Secondary and financial components areoften hidden and are easily overlooked
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What Should be Inc luded ina L i fe-c yc le Cost Analys is?
If we assume that a hybrid or alternativefueled vehicle is transparent to the userwe will be primarily concerned about:
Incremental first cost
Incremental maintenance & operating
costs Incremental Infrastructure costs (prorated)
Associated after tax cash flows
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I nc om e Tax es and t heTax shie ld
In a for-profit business, incometaxes have a significant impact on
net cash flows Taxes reduce the true cost of
expenses by acting as a tax shield
This reduction is equal to your totaleffective income tax rate
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Tax Shie ld
Example: Based on a tax rate = 10%
Income tax is $10 per $100 earned for a netincome of $90
The expenditure of $1 will reduce yourincome to $99 and your tax to $9.90 for a
net income of $89.10 Therefore, the actual cost of the $1
expenditure is only $0.90 after taxes
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Governm ent vs. Pr ivat eBusiness
Equivalent life cycle costs forgovernment entities and privatebusinesses can vary significantly
What makes good sense for one maynot make sense for the other
Cost of debt
Alternate opportunity costs
Impact of taxes for private businesses
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Tim ing o f Cash Flow s
The timing of cash flows have asignificant impact on life cycle costsdue to the discounting of future values
Front end loaded expenditures have a greaterimpact on life cycle costs than futureexpenditures
Future savings and returns have less impact onlife cycle costs than front end savings andreturns
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Tak e the Tim e t odo i t Right
Life cycle cost analysis can be a useful toolfor evaluating investment decisions whenproperly done
Learn how to make a proper after tax, netpresent value analysis
Be sure to identify all of the associated cash
flows and avoid including sunk costs in youranalysis
Alternatives must have equal life cycles
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Thank You for Your Attention