Chapter 1 -
Defining vehicle lifes

A power unit has several “lives,” including a service life, a technological life and an economic life.

Service life is the amount of time the vehicle can render service. This life may be extremely long if the unit receives adequate maintenance and replacement of worn-out components before they fail.

Technological life is the period after which productivity declines relative to newer models on the market. A 10-year-old unit, for example, may be half as productive as comparable current models. Although older vehicles have useful life left (given an unlimited maintenance budget), they cannot match modern performance requirements.

Economic life is the period after which it makes financial sense to replace the vehicle. Never has the residual value of a vehicle been more important than today. Many over-the-road trucking companies keep their vehicles for approximately three years, or 400,000 miles. Some turn their fleets over every two years.

Regardless of the type of operation, the first-ownership period has decreased dramatically as trucking companies look to stay ahead of the technology curve and unlock performance benefits. Many also use late-model, owner-operator-spec’d rigs to attract and retain drivers, to capture the highest resale value and to eliminate or reduce maintenance by using warranty maintenance provisions.

To accomplish those objectives, many trucking companies are willing to give more control of the spec’ing decision to the truck dealer. Often, they are rewarded with extended warranty protection, training, and parts and service support.
Economic life of a vehicle affects both capital and operating budgets. It’s the time when total vehicle cost is at a minimum. Total vehicle costs are all costs associated with the ownership of the vehicle, including the following:

• Depreciation
• Operations
• Maintenance
• Downtime
• Obsolescence
• Operator training
• Cost of carrying parts in inventory (including storage and insurance, but not actual parts costs)
• Interest
• Alternative capital value
• Inflation

Life-cycle costing is predicated on a timeworn formula: as principal and interest payments on the old vehicle decrease, maintenance and operating costs usually increase. The increase in maintenance and operating costs usually is less than the decrease in principal and interest. The annual resale value is the tiebreaker, along with any manufacturer incentives.

The resale value of the old vehicle, coupled with the new vehicle’s manufacturing incentive, may offset the higher cost of the new vehicle’s principal and interest. When the principal, interest, maintenance and operating costs of the old vehicle are higher than the principal, interest, maintenance and operating costs of a new vehicle, it’s time to replace the old vehicle.

If both resale values and manufacturers’ incentives are low, however, it is wise to keep the old vehicle to take advantage of the minimal principal and interest costs after the vehicle is depreciated.

Remember that you will incur higher maintenance and operating costs by extending the vehicle’s replacement cycle. You must determine whether the increased maintenance and operating costs exceed the savings from reduced principal and interest costs.

In Summary
A power unit has a service life — the amount of time it can render service; a technological life — the period after which productivity declines relative to newer models; and an economic life — the time after which it’s financially better to replace the vehicle. These three factors together help determine when it’s time to replace a vehicle. But the bottom line is: when the principal, interest, maintenance and operating costs of an old vehicle are higher than the principal, interest, maintenance and operating costs of a new vehicle, it’s time to replace the old vehicle.