Anita Night, a librarian at Vale University, lives in the community of Downtown, a community of approximately 45,000 residents; twenty-five km from school. She had been thinking about her commute
The University Shuttle Decision THE CASE Anita Night, a librarian at Vale University, lives in the community of Downtown, a community of approximately 45,000 residents; twenty -five km from school. She had been thinking about her commute to work for some time now; gas was over $4 a gallon and h er car was approaching the 100,000 km mark. After discussions with several friends who make the same commute, she and her friends were wondering if a shuttle bus would be an option that might benefit both the people who make the drive and simultaneously be profitable to the university. Anita met with Geoff Newman, Vice President of Business Affairs, to see if Vale University would consider purchasing a bus for this purpose. She opined there were quite a few people who live in Downtown who drive to the uni versity and that they would gladly pay a fare to cover the bus costs. Benefits would include a reduced “carbon footprint” and significantly fewer km being driven on the cars used by these people. Geoff met with his staff and the president of the univers ity to consider this service. After the meeting he met with Anita to explain the university’s position. While everyone liked the thought of providing the bus service, he explained, the university just isn’t in the business of providing transportation to it s employees. Vale University doesn't have the facilities or staff to maintain the equipment and there is risk that this would lose money and cost the university financially. He said, “Try explaining to the students why their tuition is going toward a shutt le bus to Downtown!” Geoff then offered an alternative; that university officials would meet with DARTS, Downtown Authority Regional Transit Services. Perhaps they would add a dedicated bus line to Vale University.DARTS is a public transportation system f or the urbanized Downtown Area, which travels about 1.5 million km per year. Over 2,700 people ride DARTS buses each day to work, doctor visits, shopping or school. People pay a minimal fare ($1.25 per fixed route), with DARTS being subsidized through a combination of tax dollars and other public funds. A week later Geoff met with Penny Kekel; controller for DARTS. Penny explained that such a service would be out of DARTS regional jurisdiction, and as such it cannot be subsidized through any public fundi ng. In effect, the service would have to be paid for entirely by user fares, and would be operated on a “for profit” basis. Geoff said the university would still be interested, and asked Penny if a proposal could be put together, culminating in the fare th at would be charged shuttle bus users. Penny agreed and added that because this would be a separate service operated for a profit, they would purchase a bus (or busses) for this service rather than use busses from the existing fleet. Penny gathered more information about the number of university community who would be using the shuttle service. The Vale University’s department of institutional research revealed that 116 faculty and staff as well as 464 students lived in Downtown. These people were surveyed and an analysis of the results lead to a projection that approximately 200 would use the shuttle service. Upon agreement with the university, the shuttle scheduled for Monday until Thursday will be: 7:20am – Downtown to Vale Universi ty then back to Downtown; 12:00pm – Downtown to Vale University then back to Downtown; 4:45pm, Downtown to Vale University then back to Downtown; 9:30pm – Downtown to Vale University then back to Downtown. The 9:30pm service exists due to the large number of students and faculty who take and teach night classes at Vale University. The Friday bus schedule will be limited: 7:20am – Downtown to Vale University then back to Downtown; 12:00pm – Downtown to Vale University then back to Downtown; 4:45pm, Downtown to Vale University then back to Down town; no 9:30 service. Each two -way commute will total 50 km . Details of projected shuttle schedule and passengers are as follows: Table 1. Projected Bus Schedule and Passengers Passengers: Monday - Thursday Departure Downtown TO Vale University Vale University -TO Downtown 7:20am 125 0 Noon 50 30 4:45pm 25 115 9:30pm 0 55 Passengers: Friday Departure Downtown TO Vale University Vale University -TO Downtown 7:20am 50 0 Noon 15 10 4:45pm 0 55 9:30pm No service No service A full-size bus, 32 passenger vehicle can be acquired for $335,000. These vehicles have an estimated life of 12-years or 500,000 km . These are diesel engine vehicles. Alternatively, minibus, 8- 11 passenger lift bus can be acquired for $55,000, which has a 7-year, 200,000-mile life. Peak demand will be Monday through Thursday at 7:20am (125 passengers) and 4:45pm (115 passengers). As such, four, 32 passenger busses will be needed to accommodate those two peak times. DARTS decided to use the bus life as the time frame for this analysis, 500,000 km or 12 years.
The average maintenance cost per vehicle is approximately $5,800 per year , and projected to grow at 5% per year. If a bus breaks down, DARTS will immediately dispatch a backup bus to the scene. The cost of dispatching this bus will be $500, inclusive of all related costs. Busses are well maintained, and this is expected to seldom happen, perhaps four times per year. This cost is expected to increase approximately 5% per year. Whilst, if a bus is full with more people wanting to ride, an additional bus will be immediately dispatched. The cost will be $350 for a minibus or $500 for the full-size bus . The DARTS management decided to project this would happen ten times throughout a year, and that the minibus would be dispatched. This cost per bus is projected to increase 5% per yea r. The bus authority is given various cost abatements with regard to fuel, and after abatements the average fuel cost for this year is expected to be $2.18 per gallon. The full-size bus averages 3.80 km per gallon. This fuel cost is projected to increase at an average of 6% pe r year. The salary for a bus driver is $36,500 per year, including overtime, shift premiums, and other costs. Fringe benefits total $21,550. It is estimated that this route will use the services of one and one half (1½) drivers throughout the year, put another way, one driver full time and second driver half time. This is expected to increase approximately 3% per year.
A daily bus route will be directly from Downtown to Vale University and back to Downtown, a drive of fifty km , round trip. The shuttle service will operate 5 days per week, with limited service on Friday. The bus service will be in operation when school is open. This would be fifteen weeks for each of the three semesters; fall, winter, and spring/summer, total of 45 weeks. Given the riskiness and uncertainty involved in this service, DARTS would like to use a 1 4% after tax return per year as its hurdle rate for evaluation for investment , and thus charging one-way fare per passenger for $7.43. DARTS income tax rate is 25%. Discussion Questions:
1) Compute:
a.The net present value of the estimated after-tax cash flows.
b . The internal rate of return.
c. The payback period.
2) Use your results in requirement 1 to recommend whether DARTS should provide the university shuttle service.
3) Outline the strategic and other qualitative considerations that may need to be taken into account in relation to the above proposal.
