Chapter 10 -
Vehicle replacement strategy

Let’s review a typical strategic vehicle replacement plan, focusing on the costs to own, operate and maintain a vehicle (excluding driver costs). On page 54 is a worksheet, Vehicle Replacement versus Repair Analysis, to help guide you through the cost collection and analysis section.

The key to identifying the optimum replacement cycle is determining the point at which combined fixed and repair costs start to increase. From the maintenance side, you must be able to identify year-to-year repair costs and miles operated on a per-unit basis. The following discussion provides information that will help you compare and contrast the cost of equipment at annual increments.

In the real world, life-cycle costs vary according to factors outside of your control, such as interest rates, fuel prices or a surge or plummet in used truck prices. These are real issues for your life-cycle costing, but to make our example easier to understand, we will assume stability in these “wild cards.” We also are assuming some predictability, based on available data, in the gradual increase in maintenance costs as a tractor ages. The following calculations assume:

• New $100,000 3-axle live tandem Class 8 tractor
• 5 percent interest amortized over five years
• 100,000 miles per year
• Average diesel price of $1.50 per gallon
• Average fuel economy of 8 miles per gallon
• Total maintenance costs increasing from 16 cents in year one to 20.2 cents in year seven (see detailed assumptions)
• Straight-line depreciation (see detailed assumptions)
• Resale value drops 30 percent in the first year and 20 percent of the purchase price each year thereafter.
• For all practical purposes, the vehicle operating cost is fuel; most other items (except driver costs) appear under maintenance.

Determining net costs
One point that might not be obvious when calculating net costs is that due to tax benefits, depreciation is a positive, not negative, factor for the first few years of a tractor’s life. We are assuming that this trucking company is making money; otherwise the tax benefits may be reduced or non-existent. Our scenario assumes a straight-line depreciation, but in reality you probably will see higher depreciation in early years. Notice that the cost per mile rises almost 5 cents in year four due to loss of that tax benefit.

Annual vehicle costs

Year	Principal/ Interest	Maintenance cost	Operating cost	Total net cost	Depreciation	Net	Cost per mile (cents)
1	$25,000	$16,000	$18,750	$59,750	($5,100)	$54,650	$4.7
2	24,000	16,700	18,750	59,450	(5,100)	54,350	54.4
3	23,000	17,400	18,750	59,150	(5,100)	54,050	54.1
4	22,000	18,100	18,750	58,850	0	58,850	58.9
5	21,000	18,800	18,750	58,550	0	58,550	58.6
6	0	19,500	18,750	38,250	0	38,250	38.3
7	0	20,200	18,750	38,950	0	38,950	39.0

Accounting for lost resale opportunity
The calculation doesn’t tell the whole story. By operating a tractor you are giving up money you could obtain by disposing of it. This lost resale opportunity is a real, though hidden, cost. The lost resale opportunity for any year is the difference between the purchase price ($100,000) and the resale value during that year. Assuming resale values decline at the rate outlined in our assumptions above, resale value and lost resale opportunity break down as shown in the chart below.

Resale value and lost resale opportunity

Year	Purchase price	Resale	Lost resale opportunity
1	$100,000	$70,000	$30,000
2	100,000	56,000	44,000
3	100,000	44,800	55,200
4	100,000	35,840	64,160
5	100,000	28,672	71,328

Equation: Adjusted net costs
The calculation of net costs adjusted for lost resale opportunity isn’t simply the sum of the total net cost and the lost
resale. The equation is:

Net vehicle cost breakdown
This formula produces the following breakdown which indicates that even taking lost resale opportunity into account, net vehicle costs drop steadily.

Net cost overview

Year	Total net cost	Cost per mile (cents)	Lost resale	Adjusted net cost	Cost per mile (cents)
1	$54,650	54.7	$30,000	$84,650	84.7
2	54,350	54.4	44,000	76,500	76.5
3	54,050	54.1	55,200	72,750	72.8
4	58,850	58.9	64.160	71,515	71.5
5	58,550	58.6	71,328	70,356	70.4
6	38,250	38.3	77,062	65,960	66.0
7	38,950	39.0	81,650	62,757	62.8

Detailed assumptions
To understand the numbers behind our calculations on the previous pages, here is the data behind the maintenance costs and depreciation.

Maintenance cost per mile (cents)

	Year:	1	2	3	4	5	6	7
Wages/benefits		3.5	4.0	4.5	5.0	5.5	6.0	6.5
Tires/tubes		1.5	1.6	1.7	1.8	1.9	2.0	2.1
Road costs/breakdowns		2.0	2.1	2.2	2.3	2.4	2.5	2.6
Permits/miscellaneous		1.0	1.0	1.0	1.0	1.0	1.0	1.0
Misc. taxes		2.0	2.0	2.0	2.0	2.0	2.0	2.0
Insurance		6.0	6.0	6.0	6.0	6.0	6.0	6.0
Total		16	16.7	17.4	18.1	18.8	19.5	20.2

Depreciation schedule
Assumptions

• Vehicle depreciates at 30 percent per year for three years
• The resale value at the end of year five is $49,000
• Total depreciation is $51,000 (purchase price minus resale value)
• Straight-line method

Fuel costs
100,000 miles per year = 12,500 gallons
8 miles per gallon

12,500 gallons x $1.50 per gallon = $18,750

The scenario outlined above suggests that you could expect a significant cost reduction after year five due to paying off the note. But your strategy shouldn’t necessarily depend on cost per mile alone. Keep in mind that fleet age affects other areas as well. As a unit gets older, repairs move from smaller, less complicated jobs to larger ones that require more advanced tooling, greater mechanical skill and more parts inventory.

Your utilization and reliability could also be seriously in doubt if your equipment becomes too old. And then there is the marketing aspect; prospects — and existing customers — may perceive older equipment as unreliable, even if it isn’t.

Don’t view any life-cycle costing as an isolated effort. Coordinate life-cycle costing with your company’s short-, medium- and long-term strategic plans. If your company gets larger, smaller or stays the same size, or if the mix and density of your equipment changes, your replacement strategy will change.

In Summary
For a typical over-the-road operation, total vehicle costs drop dramatically after the financing term because maintenance costs on older equipment typically rise gradually, unlike the dramatic drop in ownership costs once you pay off a tractor or trailer. But don’t base your replacement strategy on cost-per-mile alone; very old equipment is susceptible to
sudden and unexpected maintenance cost increases and may be too unreliable to maintain quality customer service.

Vehicle replacement vs. repair analysis

		Old Vehicle	New Vehicle
1. Labor		________________________________	________________________________
2. Parts		________________________________	________________________________
3. Estimated mileage next year		________________________________	________________________________
4. Fuel		________________________________	________________________________
5. Registration		________________________________	________________________________
6. Tax		________________________________	________________________________
7. Insurance		________________________________	________________________________
8. Principal		________________________________	________________________________
9. Interest		________________________________	________________________________
TOTAL COST		________________________________	________________________________
		Salvage value
		Total cost of old ________________________________	Total cost of new ________________________________