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BACKGROUND
Blue Ridge School is located in Charlottesville, VA. It is an all boys college preparatory boarding school grades nine through twelve. Blue Ridge School is a private school that serves young men who respond well to small classes, a structured environment and a strong sense of community.
CASE OVERVIEW
The board of education for the Blue Ridge School District is considering the acquisition of eight minibuses to replace the existing five full-size buses, for use in transporting students to school. The existing five of the school district s bus routes are under-populated, with the result that the full-size buses on those routes are not fully utilized.
CASE OVERVIEW
The board has decided that it is not feasible to consolidate these routes into fewer routes served by full-size buses. The area in which the students live is too large for that approach, since some students bus ride to school would exceed the state maximum of 45 minutes
PROBLEM IDENTIFICATION
Do the board of education need to replace existing five full-size buses to eight minibuses? (If the board decide to acquired eight minibuses), do they have to sold the existing five full-buses, or keep it as a reserve? What would Michael Jeffries (business manager) have to do regarding Peter Reynolds offer?
DATA ANALYSIS
BLUE RIDGE SCHOOL DISTRICT Alternative Data on Replacing Buses Acquisition cost per bus (year 0) Salvage value per bus (year 0) Initial cost (redesign route, inform public, install caution signs, retrain drivers) (year 0) Drivers compensation per person (yearly) Operating & Maintenance cost (yearly) Chartering buses cost (yearly) Hurdle rate Full-size Bus $ (90,000) 15,000 (18,000) (50,000) Minibus $ (27,000) (15,250) (18,000) (20,000)
MAIN ALTERNATIVES
Replace five full-size buses with eight minibuses or not?
BLUE RIDGE SCHOOL DISTRICT Purchase Minibuses & Sell Full-Size Buses (Incremental-Cost Approach) Hurdle rate 12%
Purchase Minibuses (Sell full-size buses) Year Acquisition of minibus (eight buses) @ (27,000) Operating & Maintenance cost : Full-size bus (five buses) 250,000 Minibus (eight buses) 160,000 Cost saving Incremental driver compensation cost Re-routing cost Total cashflow Present value Net present value Sell full-size buses (five buses) Total NPV
0 (216,000)
90,000 (54,000) (15,250) (231,250) (231,250) (101,478) $ 75,000 $ (26,478) 36,000 32,143
@ 15,000
TWO OPTION
Sold five full-size buses immediately or keep it as a reserve?
BLUE RIDGE SCHOOL DISTRICT Sell or Keep The Five Full-Size Buses Hurdle rate Sell the full-size buses Sales of five full-size buses Annual savings on bus charter Charter cost : before Charter cost : after Annual saving Present value Net present value Difference in NPV 1 30,000 5,000 25,000 22,321 90,119 $ 15,119 2 30,000 5,000 25,000 19,930 3 30,000 5,000 25,000 17,795 4 30,000 5,000 25,000 15,888 5 30,000 5,000 25,000 14,186 12%
75,000
90,000
90,000
90,000
90,000
90,000
Based on IRR trial & error calculation, if Blue Ridge School District decided to sold full-bus immediately, the IRR is 4.02%. But if they decided to keep as a reserve, the IRR is 9.02%. Both result show that the project is unviable because it below the required rate of return/ hurdle rate
DATA INTEPRETATION
Based on the calculation, Blue Ridge School District is better to keep the five full-size buses as a reserve. Because it contribute higher NPV (assume there are no increase in maintenance cost) compare if they immediately sold the buses. Qualitatively, Blue Ridge School District can t predict what s going to happen to their buses in the future (it could suddenly broke down). They need to have some reserve in order to accommodate the needs of uncertainty
DATA INTEPRETATION
Based on the NPV calculation earlier, either keep or sell the full-size buses, minibuses acquisition resulted a negative NPV. The data indicate that the project is unviable to proceed But we need to consider the qualitative factor: - Blue Ridge School is a Private school that threat special need students, bus delivery could be one of their program/ services value.
IRRELEVANT DATA
Data that irrelevant for the School Board in making their decision is Full-size Buses acquisition price. The data irrelevant because Blue Ridge School has no plan to purchase another full-size bus, and it was sunk cost. The data could be relevant if the board have the information of full-size buses economic product life time & income-tax rate. In that way they can calculate depreciation cost which later could effect income-tax saving and compare it to the one that have the biggest saving.
ETHICAL ISSUE
Mr. Jeffries shouldn t have brought up the conversation regarding the Blue Ridge opinion to replace the existing full-size buses. Such an issue is confidential and all details on the issue should only be discussed for internal purposes. Let alone, no decision has been made yet by the school board. Mr. Jeffries should not involving in such a conversation. He should refused to comment Mr. Reynolds question. Moreover Mr. Reynolds offering should not alter his recommendation to the school board.
CONCLUSION
As a result from the calculation, that either sell or keep as a reserve the full-size buses and change it into minibuses, it showed negative NPV and IRR under it hurdle rate. In quantitative value, Blue Ridge School District should not proceed their plan on replacing the existing five school buses with eight minibuses.
RECOMMENDATION
In the business, as qualitative factor that mention before, even though the quantitative calculation shows negative result, we think Blue Ridge School District need to proceed their plan on replacing the existing five school buses with eight minibuses, considering that is one of their value service as a private school for special students.
RECOMMENDATION
Try to find another cheaper vehicles or sources of dealer could be strategies that Blue Ridge School should consider if they decided to buy minibuses. It would be helpful if they have more data (like life time assets and income-tax rate) if they want to have better view on making the decision.