Introduction -
Old and new vehicles: Comparing costs

Hetermining the right time to replace a vehicle is one of the most important decisions in running a successful and profitable trucking company. A well-thought-out replacement strategy is the basis for an efficient fleet operation and a foundation for other decisions regarding your business.

Life-cycle costing provides a lens through which to view and measure vehicle performance and to track the trends and changes in the equipment ownership cycle, helping you better manage your fleet.

During a vehicle’s service life, some costs increase; some remain level. A few even decrease. These costs are the main factors in determining the economic life of the vehicle. As a rough rule of thumb, if the vehicle’s total projected repair cost equals or exceeds 30 percent of its residual value, consider replacing it.

Vehicle life-cycle management involves an annual financial calculation of what the vehicle currently costs to own and operate versus what a new vehicle would cost to own and operate. This comparison will help you determine when you should replace a vehicle, although economic priorities may prevent replacing a vehicle when life-cycle costing dictates. Ideally, however, vehicle replacement should coincide with the life-cycle cost determination.

Some situations require you to accelerate vehicle replacement, of course — deteriorated vehicle condition, accident damage or changes in the operating environment. No replacement policy will apply to every truck or trailer.

A life-cycle costing formula is just that — a formula. By analyzing trends, it provides a yardstick that is subject to change with the economic uncertainties of the marketplace and operating demands of your company. Most trucking companies have a vehicle replacement policy defined in terms of miles, years or both. Such policies evolve through experience, instinct, cost analysis and personal preferences. They provide the basis for an annual fleet review that identifies the vehicles meeting these criteria and lists them in descending order of age or mileage.

Life-cycle costing also depends on the following factors:

• Company conditions (growth, status quo, consolidation)
• Effectiveness of the company’s vehicle maintenance program
• Vehicle use
• Vehicle availability
• New vehicle incentives
• Vehicle obsolescence
• Vehicle resale value
• New vehicle cost
• Interest rates
• Company image
• Vendor maintenance support
• Company expensing or capitalization of vehicle costs
• Customer demands
• Accidents