SBM3307 Project B: ABC Company Transportation Cost Analysis

This project analyzes the transportation cost optimization for ABC Company, a construction firm with a new project 31km from its head office. The company explores four options: purchasing a new car, purchasing a used car, renting a car, and providing travel allowances (which is rejected). The project utilizes Net Present Value (NPV), Internal Rate of Return (IRR), and sensitivity analysis to evaluate the financial feasibility of the first three options over a five-year period, considering factors like depreciation, insurance, fuel, and tax rates. The analysis includes depreciation calculations using both declining balance and straight-line methods. The report determines the optimal transportation solution based on the financial metrics and provides recommendations for the company's stakeholders, including shareholders, government, and employees. Sensitivity analysis is performed by changing the initial cost, insurance cost and fuel costs. The project concludes that purchasing a used car is the most financially viable option.

Contents
Introduction...........................................................................................................................................2
Analysis..................................................................................................................................................2
Option 1- Purchasing a First hand new car and depreciating the asset at 15% per annum...............2
Option 2 Purchasing a Second hand car and depreciating the asset at 20% per annum...................3
Net Present Value Analysis and Internal Rate of Return Analysis..........................................................4
Option-1- Purchasing a new car.........................................................................................................4
Sensitivity Analysis.................................................................................................................................7
Option -1............................................................................................................................................8
Option -2..........................................................................................................................................11
Option -3..........................................................................................................................................14
References...........................................................................................................................................18

Development and Optimisation
Introduction
The present case deals with analysing the cost operation of transportation of employees for a
new project. The project involves a 31 Km to and fro movement every day for the employees
and the concerned company i.e ABC company is considering various alternatives to reduce
the cost of travel to optimum. In this regard, the company has explored four alternatives for
optimising the cost of travel. The options explored has been detailed here-in-under:
(a) Purchasing of first and brand new car and incurring necessary expenditure;
(b) Purchasing a second car and incurring necessary expenditure;
(c) Renting a car and incurring necessary expenditure;
(d) Providing Travel allowance to the employees.
Further, option (d) has been rejected outright by the company based on merits and demerits
of the plan and the said cost has been considered as a benchmark for evaluating the
feasibility of other project. On the basis of above details, the opportunities have been
explored vide three financial analysis tools i.e. Net Present Value, Internal Rate of Return
and Sensitivity Analysis.
Analysis
Under the first two business model, the asset is purchased and depreciated at 15% and 20%
respectively based on the outwear and usage. Also, the computation of depreciation has been
considered under two methods i.e. declining balance method and written down value
method. The computation of depreciation under two method for the two options has been
presented as under:
Option 1- Purchasing a First hand new car and depreciating the
asset at 15% per annum
Computation of Depreciation under Declining Method
Sl No Particulars Amount
1 Cost of Purchase 36500
2 Depreciation for 1st year 5475
3 Closing Balance 31025
4 Depreciation for 2nd year 4653.75
5 Closing Balance 26371.25
6 Depreciation for 3rd year 3955.6875
7 Closing Balance 22415.563
8 Depreciation for 4th year 3362.3344
9 Closing Balance 19053.228
10 Depreciation for 5th year 2857.9842

Computation of Depreciation under Straight Line Method
Sl. No Particulars Amount
1 Cost of Purchase 36500
2 Depreciation for 1st year 5475
3 Closing Balance 31025
4 Depreciation for 2nd year 5475
5 Closing Balance 25550
6 Depreciation for 3rd year 5475
7 Closing Balance 20075
8 Depreciation for 4th year 5475
9 Closing Balance 14600
10 Depreciation for 5th year 5475
On perusal of the above, it can be inferred that the assets are not fully written off under any
of method and the asset has an ending value which has not been considered for analysing the
net present value of the project. Other view may also be taken that asset has nil value post
five years of project. Accordingly, has been disposed off for nil.
Option 2 Purchasing a Second hand car and depreciating the asset
at 20% per annum
Computation of Depreciation under Declining Method
Sl. No Particulars Amount
1 Cost of Purchase 12000
2 Depreciation for 1st year 2400
3 Closing Balance 9600
4 Depreciation for 2nd year 1920
5 Closing Balance 7680
6 Depreciation for 3rd year 1536
7 Closing Balance 6144
8 Depreciation for 4th year 1228.8
9 Closing Balance 4915.2
10 Depreciation for 5th year 983.04
Computation of Depreciation under Straight Line Method
Sl No Particulars Amount
1 Cost of Purchase 12000
2 Depreciation for 1st year 2400
3 Closing Balance 9600
4 Depreciation for 2nd year 2400
5 Closing Balance 7200
6 Depreciation for 3rd year 2400
7 Closing Balance 4800

Computation of Depreciation under Straight Line Method
Sl No Particulars Amount
8 Depreciation for 4th year 2400
9 Closing Balance 2400
10 Depreciation for 5th year 2400
On perusal of the above, it can be inferred that the assets are not fully written off under
declining balance method and the asset has an ending value which has not been considered
for analysing the net present value of the project. Other view may also be taken that asset has
nil value post five years of project. Accordingly, has been disposed off for nil.
Net Present Value Analysis and Internal Rate of Return
Analysis
Net Present Value is a financial analysis tool used for decision making. The tool indicates
that the feasibility of project based on cash flows of a project and time value of money. The
computation of net present value encompasses determining the net present value of outflows
of a project and the net present value of inflows. (CFI Education Inc., 2019) If the inflows
are higher than outflows than the project has positive net present value and vice versa. The
higher the positive value, the more feasible the company shall be.
Internal Rate of Return is another decision making tool which analyse the rate of return
generated by the investment. Under the said method, discount rate is derived at which the
present value of inflows are equal to the present value of outflows. (InvestingAnswers, Inc. ,
2019)The higher the Internal Rate of Return, the more feasible the project shall be.
The assumptions underlying the computation has been encompassed as under:
(a) the rate of inflation rate shall be 2.50%;
(b) the rate of deprecation shall be 15% p.a for new car;
(c) the rate of deprecation shall be 20% p.a for the used car.
(d) the tax rate shall be 30%;
(e) the discount rate for computing net present value shall be 9%.
On the basis of above the computation of net present value and internal rate of return for the
three options has been enumerated here-in-below:
Option-1- Purchasing a new car
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 36500
2 Insurance -1001 -1026 -1052 -1078 -1105
3 Rego -1150 -1179 -1208 -1238 -1269

Sl
No Particulars Year 0 1 2 3 4 5
4 Fuel Consumption -1882 -1929 -1977 -2027 -2077
5 Maintenance -600 -615 -630 -646 -662
6 Depreciation -5475 -5475 -5475 -5475 -5475
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 9392 9763.7 10144.6 10535.1 10935.4
9 Less : Income Tax -2817.6 -2929.1 -3043.39
-
3160.539877 -3280.62
10 Net Operating Income 6574.4
6834.57
3
7101.24
9 7374.593045 7654.77
11 Depreciation 5475 5475 5475 5475 5475
12
Net operating Cash inflow/
Outflow -36500 12049.4
12309.5
7
12576.2
5 12849.59305
13129.7
7
13 Discounting Factor 1
0.91743
1 0.84168
0.77218
3 0.708425211
0.64993
1
14 PV of Cash Flow -36500 11054.5
10360.7
2
9711.17
2 9102.975665 8533.45
15 NPV
12262.
8
16 IRR 21%
Option-2- Purchasing a used car
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 12000
2 Insurance -900 -923 -946 -969 -993
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -2275 -2332 -2390 -2450 -2511
5 Maintenance -800 -820 -841 -862 -883
6 Depreciation -2400 -2400 -2400 -2400 -2400

Sl
No Particulars Year 0 1 2 3 4 5
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 11975 12334.4 12702.7 13080.3 13467.3
9 Less : Income Tax -3592.5
-
3700.31
-
3810.82
-
3924.0908
2
-
4040.19
10 Net Operating Income 8382.5
8634.06
3
8891.91
4
9156.2119
14
9427.11
7
11 Depreciation 2400 2400 2400 2400 2400
12
Net operating Cash inflow/
Outflow -12000 10782.5
11034.0
6
11291.9
1
11556.211
91
11827.1
2
13 Discounting Factor 1
0.91743
1 0.84168
0.77218
3
0.7084252
11
0.64993
1
14 PV of Cash Flow -12000
9892.20
2 9287.15
8719.42
9
8186.7118
64
7686.81
5
15 NPV
31772.
3
16 IRR 88%
Option-3- Hire a car
Sl No Particulars Year 0 1 2 3 4 5
1 Initial Deposit 34668
2 Insurance -4674 -4791 -4911 -5033 -5159
3 Rego 0 0 0 0
4 Fuel Consumption -1882 -1929 -1977 -2027 -2077
5 Maintenance 0 0 0 0
6 Depreciation 0 0 0 0
7 Savings of Travel Allowance 19500 19988 20487 20999 21524

Sl No Particulars Year 0 1 2 3 4 5
8 Net Incremental income 12944 13267.6 13599.3 13939.3 14287.8
9 Less : Income Tax -3883.2 -3980.28 -4079.79 -4181.781675 -4286.33
10 Net Operating Income 9060.8 9287.32 9519.503 9757.490575 10001.43
11 Depreciation 0 0 0 0 0
12 Net operating Cash inflow/ Outflow -34668 9060.8 9287.32 9519.503 9757.490575 10001.43
13 Discounting Factor 1
0.91743
1 0.84168 0.772183 0.708425211 0.649931
14 PV of Cash Flow -34668
8312.66
1 7816.951 7350.803 6912.45232 6500.242
15 NPV 2225.1
16 IRR 11%
On perusal of the above, it can be inferred that Net Present Value and IRR is highest for
option 2 and company shall go for purchasing a second hand car for the project. The Net
Present Value computed under the said model stands at $ 31,772.3 and IRR has been
computed at 88%.
Sensitivity Analysis
The sensitivity analysis has been carried out by changing the following three parameters:
(a) Increase the initial cost by 20%;
(b) Increasing the insurance cost by 20%;
(c) Increasing Fuel Cost by 20%
A brief snapshot of the analysis has been presented as under:
Sl. No Particulars
Increase the
initial cost by
20%
Increasing the
insurance cost
by 20%
Increasing
Fuel Cost by
20%
1. Option -1 6240.6 11692.2 11190
2. Option -2 29932.4 31259.3 30475.5
3. Option -3 -4708.5 -439.3 1152.3
On perusal of the above, it can be inferred that initial cost is one of the critical factor in the
cost benefit analysis and option 2 yield best results under all situation.
Stakeholders Influenced

Since the direct impact of the proposed plan shall be on the employees of the company and
the company itself. Further, indirect influence shall be on the shareholders and government
in the form of profit and taxes. Thus, these people can be considered the major stakeholders
to be influenced by the plan. A brief role is stated as under:
Shareholders: Profit;
Government: Tax;
Employees: Benefits;
Customer: Service
Other Alternative Option
The other alternative option that can be explored by the company includes:
(a) Providing a fixed travel expense and rest part is borne by employees;
(b) Work from home if feasible.
Option -1
Sensitivity -1 Increase Initial cost by 20%
Sl
No Particulars
Year
0 1 2 3 4 5
1 Initial Cost
4380
0
2 Insurance -1001 -1026 -1052 -1078 -1105
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -1882 -1929 -1977 -2027 -2077
5 Maintenance -600 -615 -630 -646 -662
6 Depreciation -6570 -6570 -6570 -6570 -6570
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 8297 8668.7 9049.6 9440.1 9840.4
9 Less : Income Tax -2489.1 -2600.6
-
2714.8
9
-
2832.0
4
-
2952.1
2
10 Net Operating Income 5807.9
6068.0
73
6334.7
49
6608.0
93
6888.2
7

Sensitivity -1 Increase Initial cost by 20%
Sl
No Particulars
Year
0 1 2 3 4 5
11 Depreciation 6570 6570 6570 6570 6570
12
Net operating Cash inflow/
Outflow
-
4380
0
12377.
9
12638.
07
12904.
75
13178.
09
13458.
27
13 Discounting Factor 1
0.9174
31
0.8416
8
0.7721
83
0.7084
25
0.6499
31
14 PV of Cash Flow
-
4380
0
11355.
87
10637.
21
9964.8
34
9335.6
93
8746.9
52
15 NPV
6240.
6
16 IRR 14%
Sensitivity -2 Increase Insurance cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 36500
2 Insurance -1201.2 -1231 -1262 -1294 -1326
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -1882 -1929 -1977 -2027 -2077
5 Maintenance -600 -615 -630 -646 -662
6 Depreciation -5475 -5475 -5475 -5475 -5475
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 9191.8 9558.5 9934.3
10319.
5
10714.
4
9 Less : Income Tax
-
2757.5
4
-
2867.5
4
-
2980.2
9
-
3095.8
6
-
3214.3
2
10 Net Operating Income 6434.2 6690.9 6954.0 7223.6 7500.0

Sensitivity -2 Increase Insurance cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
6 29 15 78 82
11 Depreciation 5475 5475 5475 5475 5475
12
Net operating Cash inflow/
Outflow
-
36500
11909.
26
12165.
93
12429.
01
12698.
68
12975.
08
13 Discounting Factor 1
0.9174
31
0.8416
8
0.7721
83
0.7084
25
0.6499
31
14 PV of Cash Flow
-
36500
10925.
93
10239.
82
9597.4
8
8996.0
63
8432.9
13
15 NPV
11692.
2
16 IRR 20%
Sensitivity -3 Increase fuel cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 36500
2 Insurance -1001 -1026 -1052 -1078 -1105
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -2258.4 -2315 -2373 -2432 -2493
5 Maintenance -600 -615 -630 -646 -662
6 Depreciation -5475 -5475 -5475 -5475 -5475
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 9015.6 9377.9 9749.2
10129.
8
10519.
9
9 Less : Income Tax
-
2704.6
8
-
2813.3
6
-
2924.7
6
-
3038.9
4
-
3155.9
7
10 Net Operating Income 6310.9 6564.5 6824.4 7090.8 7363.9

Sensitivity -3 Increase fuel cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
2 06 31 54 38
11 Depreciation 5475 5475 5475 5475 5475
12
Net operating Cash inflow/
Outflow
-
36500
11785.
92
12039.
51
12299.
43
12565.
85
12838.
94
13 Discounting Factor 1
0.9174
31
0.8416
8
0.7721
83
0.7084
25
0.6499
31
14 PV of Cash Flow
-
36500
10812.
77
10133.
41
9497.4
17
8901.9
68
8344.4
29
15 NPV
11190.
0
Option -2
Sensitivity -1 Increase Initial cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 14400
2 Insurance -900 -923 -946 -969 -993
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -2275 -2332 -2390 -2450 -2511
5 Maintenance -800 -820 -841 -862 -883
6 Depreciation -2880 -2880 -2880 -2880 -2880
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 11495 11854.
4
12222.
7
12600.
3
12987.
3
9 Less : Income Tax -3448.5
-
3556.3
1
-
3666.8
2
-
3780.0
9
-
3896.1
9
10 Net Operating Income 8046.5 8298.0
63
8555.9
14
8820.2
12
9091.1
17

Sensitivity -1 Increase Initial cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
11 Depreciation 2880 2880 2880 2880 2880
12 Net operating Cash inflow/
Outflow
-
14400
10926.
5
11178.
06
11435.
91
11700.
21
11971.
12
13 Discounting Factor 1 0.9174
31
0.8416
8
0.7721
83
0.7084
25
0.6499
31
14 PV of Cash Flow -
14400
10024.
31
9408.3
52
8830.6
24
8288.7
25
7780.4
05
15 NPV 29932.
4
16 IRR 73%
Sensitivity -2 Increase Insurance cost by 20%
Sl
No Particulars Year 0 1 2 3 4 5
1 Initial Cost 12000
2 Insurance -1080 -1107 -1135 -1163 -1192
3 Rego -1150 -1179 -1208 -1238 -1269
4 Fuel Consumption -2275 -2332 -2390 -2450 -2511
5 Maintenance -800 -820 -841 -862 -883
6 Depreciation -2400 -2400 -2400 -2400 -2400
7 Savings of Travel Allowance 19500 19988 20487 20999 21524
8 Net Incremental income 11795 12149.
9
12513.
6
12886.
5
13268.
6
9 Less : Income Tax -3538.5
-
3644.9
6
-
3754.0
9
-
3865.9
4
-
3980.5
9
10 Net Operating Income 8256.5 8504.9
13
8759.5
35
9020.5
24
9288.0
37