Equipment Focus By Robert "Bob" Johnson
Life-cycle Cost Analysis Getting the most from your limited budget
Photo courtesy of GMC
how much work should I do: just enough to get by, or a complete overhaul? Is it better to replace two low-cost units or one higher-cost unit? In far too many cases, the answers to these questions are based on educated guesses or are driven by external decision makers with their own agendas. One of the best financial analysis tools available to fleet managers for making decisions of this nature is the net present value (NPV)
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inancial constraints often force fleet managers to make tough equipment decisions. Should I repair a vehicle or replace it? If I do repair it,
life-cycle cost analysis. Instead of relying on guesswork, and not being able to fully defend your position, an NPV life-cycle cost analysis will show you the true total cost of each alternative. Many fleet managers have used life- cycle cost studies for years. Unfortunately, the usual study only considers direct cash flows. A typical logic thread might be something like: If I spend $1,000 today, I will save $250 a year, which means I will recoup my investment in four years. There are two faults with this type of analysis. First, it does not consider the time value of money. Second, decisions made by a fleet manager working for a tax-paying
entity have a direct impact on the taxes the entity pays. An after-tax NPV life- cycle cost analysis addresses both of these issues.
What is the difference? The time value of money is directly
related to an entity's cost of money. A tax- paying business's cost is normally consid- ered to be its minimum acceptable internal rate of return. For a government agency, it is typically the weighted cost of debt (direct loans, bonds, etc.). This cost of money, which is normally expressed as a percentage, means that one dollar at some point in the future is worth less than a
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