Bob Johnson NTEA Presentation

7/31/2019 Bob Johnson NTEA Presentation

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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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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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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

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Bob Johnson NTEA Presentation