Vehicle Replacement Policy Analysis for CHL Health: CO5109 Report

This report provides a comprehensive analysis of vehicle replacement policies within the context of corporate finance, specifically focusing on the case of CHL Health. The report compares the financial implications of using two vehicle models: the Tesla Model X 100D and the BMW 6 Series 640i X Drive. It meticulously calculates the annual equivalent costs and total expected costs for each model over a five-year period, considering factors such as purchase cost, registration, insurance, energy, servicing, depreciation, and trade-in values. The analysis incorporates key assumptions like depreciation method, vehicle usage, and required return. Through detailed cost breakdowns and net present value calculations, the report identifies the more financially beneficial option for CHL Health, recommending the optimal replacement strategy to minimize operational costs and maximize the efficiency of the vehicle fleet. The conclusion highlights the importance of timely vehicle replacement to reduce costs. The report is intended to assist the company in making an informed decision.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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CORPORATE FINANCE
Executive summary:
Vehicle replacement policy for any organization is an important part of overall management of
the organization. It is important to have a standard vehicle replacement policy within an
organization to minimize the cost of operations of maintaining its vehicles. In this case, CHL
Health has a fleet of vehicles thus, it becomes even more important to have an optimum
replacement policy to manage the fleet of vehicles well. Reducing the operating costs would be
possible by the organization only if it has an effective vehicle replacement policy. Keeping in
mind these objectives the document below discusses an appropriate vehicle replacement policy
for the organization.

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Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Critical analysis of two different models and application of theoretical concepts to business:......3
Analysis of Tesla model:.................................................................................................................3
BMW 6 Series 640i X Drive analysis:............................................................................................8
Conclusion and recommendations:................................................................................................12
References:....................................................................................................................................14

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Introduction:
The CHL Health has two models of vehicles, i.e. Model X 100D from Tesla and 6 Series 640i X
Drive from BMW out of which the organization should choose the model that will minimize the
cost of managing vehicle fleets. With the objective of formulating an optimum vehicle
replacement policy for the organization the document shows the financial implications on the
operating expenses of managing vehicle fleet of the organization.
Critical analysis of two different models and application of theoretical concepts to business:
Cunningham Holdings Limited must use an effective vehicle replacement policy for its
subsidiary CHL Health to reduce the cost of managing its vehicle fleets. CHL Health has two
models to choose its vehicle fleet from, i.e. BMW and Tesla models. An organization will
always choose a model of vehicle fleet that would minimize the operating cost of maintaining
vehicle fleet. Thus, CHL Health shall compute the expected operating costs of vehicle fleet under
two different models. The model that is expected to have lower operating costs shall be chosen
over the other for obvious reason (Thakor, 2017).
In this case it is also important to note that the company should not only advised about the model
that should be included in its vehicle fleet but also the replacement policy to be followed by the
company to ensure optimal use of vehicles as well as capitalizing on the opportunity of trade in
facilities of old vehicles ("Special Issue of Management Accounting Research on Strategic
Management Accounting", 2017).
Analysis of Tesla model:
The members of management undertaking JCU MBA program are expected to be given new
company vehicles as the reward for undertaking such difficult course and suffering long

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sleepless nights to study. In case the management decides to provide the members undergoing
JCU MBA program with Tesla model X 100 D then the equivalent annual cost to the company
would be as following.
year 2019 2020 2021 2022 2023
Required Return 13% 13% 13% 13% 13%
Cost Analysis
Purchase Cost
-
160,000.0
0
160,000
.00
160,000.
00
160,000.
00
160,000.0
0
Registration
1.00
8,000.0
0
8,000
.00
8,000.
00
8,000.
00
8,000.0
0
Insurance
2.00
4,000.0
0
4,000
.00
4,000.
00
4,000.
00
4,000.0
0
Energy (Fuel/Power)
100kwhr = $17 =
600kms
3.00
850.
00
85
0.00
850.
00
850.
00
850.
00
Servicing
4.00
8,000.0
0
12,000
.00
16,000.
00
20,000.
00
24,000.0
0
5.00

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6.00
Total Operating Costs 20,850.0
0
24,850
.00
28,850.
00
32,850.
00
36,850.0
0
0.
88 0.78
0
.69
0
.61
0.
54
NPV of Purchase Costs 141,592.9
2
125,303
.47
110,888.
03
98,131.
00
86,841.5
9
NPV of Operating Costs 18,451.3
3
19,461
.20
19,994.
50
20,147.
52
20,000.7
0
Depreciation 28,000.0
0
28,000
.00
28,000.
00
28,000.
00
28,000.0
0
Trade-In Analysis
Trade-In Current
-
Trade-in/Sales at End
1.00
132,000.0
0
2.00
104,000
.00
76,000.

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3.00 00
4.00
48,000.
00
5.00
20,000.0
0
NPV of Trade-ins 116,814.1
6
81,447
.26
52,671.
81
29,439.
30
10,855.2
0
Total NPV (1+2+3) 276,858.4
1
226,211
.92
183,554.
34
147,717.
82
117,697.4
9
Equivalent Annual Cost 55,371.6
8
56,552
.98
61,184.
78
73,858.
91
117,697.4
9
It is important to firstly note the assumptions which have been used to calculate the above annual
equivalent cost of maintaining and replacing the Tesla model in different years. The assumptions
made to calculate the annual equivalent cost are outlined below.
I. Registration cost of the new vehicle is 5% of purchase cost of the vehicle.
II. Insurance amount is approximately 2.5% of the purchase cost of the vehicle.
III. Vehicle will run approximately 30,000 km per year.

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IV. Depreciation will be charged under straight line method with residual value of the
model expected to be $20,000 at the end of year 5.
As can be seen from the above that the annual equivalent cost to the company increases with
passing of each year. This is mainly due to the fact that with each passing year the trade in value
of vehicle is reduced whereas the annual repair, maintenance and services expenses increase
significantly. Thus, the annual equivalent cost of Tesla model in year 1 is expected to be
$55,371.68 with total cost of 5 years expected to be $276,858.41. The total cost though reduces
with each passing year but the annual equivalent cost increases as can be seen from the table 1.
In year 2 the total expected cost of maintaining and operating a Tesla model X 100D is expected
to be $226,211.92 with annual equivalent cost increases to $56,552.98 ("Management
Accounting Research Group Conference in Association with the Management Control
Association", 2018). The annual equivalent cost increases for the vehicle model with each
passing year. In fact in year 5 the annual equivalent cost of the vehicle is expected to be
$117,697.49. Thus, if the Tesla model X 100D is used in the vehicle fleet of CHL Health then
the total expected cost would be $276,858.41 in five years with annual equivalent cost expected
to be $55,371.68. Now let us calculate the expected total cost of operating BMW vehicle to
understand which model would be financially beneficial for the company (Krylov, 2016).
BMW 6 Series 640i X Drive analysis:
Another alternative model of vehicle that the management of CHL Health has in mind to be used
in the vehicle fleet of the organization is BMW 6 Series 640i X Drive. Let us calculate the cost
of operating this particular model to compare which model would enable the organization to
minimize its cost of managing vehicle fleet. The table below contains the operating cost of
managing and operating BMW model vehicle fleet by the organization.

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BMW
year 2019 2020 2021 2022 2023
Required Return 13% 13% 13% 13% 13%
Cost Analysis(in AUD)
Purchase Cost 0 159,00
0.00
159,
000.00
159,0
00.00
159,0
00.00
159,00
0.00
Registration 1 7,95
0.00
7,
950.00
7,9
50.00
7,9
50.00
7,95
0.00
Insurance 2 3,97
5.00
3,
975.00
3,9
75.00
3,9
75.00
3,97
5.00
Energy (Fuel/Power) 100kwhr =
$17 = 600kms
3 8
50.00 850.00
8
50.00
8
50.00
8
50.00
Servicing 4 12,72
0.00
15,
900.00
19,0
80.00
22,2
60.00
25,44
0.00
5
6
Total Operating Costs 25,49 28, 31,8 35,0 38,21

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5.00 675.00 55.00 35.00 5.00
0.88 0.78 0.69 0.61 0.54
NPV of Purchase Costs 140,70
7.96
124,
520.32
110,1
94.98
97,5
17.68
86,29
8.83
NPV of Operating Costs 22,56
1.95
22,
456.73
22,0
77.11
21,4
87.62
20,74
1.57
Depreciation 25,80
0.00
25,
800.00
25,8
00.00
25,8
00.00
25,80
0.00
Trade-In Analysis
Trade-In Current 0 ? ? ? ? ?
Trade-in/Sales at End 1 133,20
0.00
2 107,
400.00
3 81,6
00.00
4 55,8
00.00

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5 30,00
0.00
6
6
NPV of Trad-ins 117,87
6.11
84,
109.95
56,5
52.89
34,2
23.19
16,28
2.80
Total NPV (1+2+3) 281,14
6.02
231,
087.01
188,8
24.98
153,2
28.48
123,32
3.20
Equivalent Annual Cost 56,22
9.20
57,
771.75
62,9
41.66
76,6
14.24
123,32
3.20
Assumptions are outlined below:
I. Registration cost of the new vehicle is 5% of purchase cost of the vehicle.
II. Insurance amount is approximately 2.5% of the purchase cost of the vehicle.
III. Vehicle will run approximately 30,000 km per year.
IV. Depreciation will be charged under straight line method with residual value of the
model expected to be $30,000 at the end of year 5.

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As per the above calculation the total cost of managing BMW fleet vehicle for each vehicle is
expected to be $281,146.02 with annual equivalent annual cost of $56,229.20 in year 1. The total
cost with each passing year again just like Tesla model is expected to decline however, the
annual equivalent cost of managing the model is expected to increase significantly. In year 2 the
total expected cost of managing each BMW model is expected to be $231,087.01 with annual
equivalent cost of $57,771.75. In year 3 the expected total cost is $188,824.98 and annual
equivalent cost is $62,941.66. In year 4 the total cost of managing the model has expected to
further decline to $153,228.48 with annual equivalent cost expected to increase to $76,614.24. In
year 5 as can be seen that the total cost and annual equivalent cost of managing the BMW model
are both expected to be same at $123,323.20 (Johansson & Siverbo, 2018).
Thus, one thing is for clear, i.e. irrespective of the model used by the CHL Health the,
organization should replace the vehicle as soon as possible to optimize the utilization of vehicle
and reduce the annual equivalent cost of the vehicle.
Conclusion and recommendations:
The annual equivalent costs of both Tesla and BMW models disclosed the importance of
replacing the vehicle as soon as possible to minimize the annual equivalent cost of vehicle
management. Thus, replacement of vehicle whenever feasible by the company should be
considered to reduce the overall cost of operating and managing a particular vehicle fleet
(Johnsen, 2015).
As per the financial analysis it is clear that the annual equivalent cost as well as the total
expected cost of maintaining Tesla Model X 100D are slightly lower than the corresponding
costs of maintaining BMW 6 Series 640i X Drive. The annual equivalent costs of Tesla and