Looking at the population trends it can be seen that within our operating boundaries in the forecasted future the number of people ages over 60 and under 11 will have increased so there will be increased demand for low-floor easy-access buses to ensure that these people have a safe and pleasant journey with minimal difficulties.
The newer fleet offered by the company may also help to bring back up the number of passenger journeys as it has fell over recent years whilst our competitor has seen a dramatic increase in theirs. This may also lead to increased fare revenue per passenger mile which has stayed constant for us over the year; however it has grown significantly for our competitor.
The idea of 15 new vehicles also presents a larger average rate of return than a new depot as displayed in the investment appraisal figures.
Disadvantages
The disadvantages of the investment of these funds into 15 new vehicles is that is purchasing 15 vehicles to add to a fleet of 70 really going to rejuvenate the fleet in a way that will see us become an active player in the market and put a halt to the growth of our rival? The answer is probably not, as the majority of the fleet will still be rapidly ageing thus unreliable and uncomfortable so unsatisfactory for the customer.
Is it also possible that these new buses will lower maintenance costs? Again probably not as the rest of the fleet will still be ageing with repairs growing increasingly more expensive so this problem is unlikely to be solved with such ease.
The new vehicles also carry a high initial outlay and with gearing still at 40% wouldn’t this present a problem in obtaining the necessary funds to purchase these new vehicles. The payback on this investment is also longer which could present a problem in a time of economic instability. The vehicles’ expected life of 15 years is only half that of the new depot investment so more money will be needed sooner to pay for more improvements.
New Depot
Advantages
As the company’s position in our current market begins to weaken due to the increasing growth of our main rival, Destina, in the market place the possibility of moving our company to a new out of town purpose-built location would seem like a good option as it presents the opportunity to bring about a start to a whole new era for the company. The new location would allow us to restructure the company to operate more efficiently and hopefully drive down our operating costs. This would then lead to a turn around in our recent situation of a decreasing net profit. Although the fleet will still be considerably older than the Destina fleet, with the new depot we will have improved maintenance facilities which will help us to drive down the costs of maintenance which have continued to grow over recent years as well as decrease the number of breakdowns that occur per week which again have been increasing steadily over recent years.
The new depot would cost £3m as an initial outlay but it would be partly funded by the sale of our current depot for an expected value of £2m. This would leave us with only having to obtain £1m in additional funding to carry out this investment.
The payback on the new depot is shorter than that of the new vehicles which would be desirable with the ongoing threat of Destina’s growth rate and also the new depot has a much longer expected life do can be depreciated over a greater period of time in the financial accounts which will present the company as more profitable than in the new vehicle scenario. The new depot would also improve our acid test ratio as it will be a greater fixed asset to the company.
Disadvantages
The disadvantages of moving the company to a new purpose built depot would be that it could carry a huge opportunity cost as we would have invested a lot of money into the building and yet we would still have an ageing fleet which if anything went wrong with that we was unable to repair with the new maintenance facilities we would be unable to replace due to having no reserves and also having a high gearing ratio it is unlikely banks would allow us to borrow from them.
The fleet would still be considered out of date from a customers point of view compared to the relative youthfulness of the Destina fleet so passenger journey figures may decrease yet again as customers look for a much more appealing method of public transport to get them out of their cars which in this case would no doubt resort in them using Destina’s new low-level easy-access so more convenient to travel on buses.
Summary
In summary I believe for our company to succeed in consolidating our position in the market place I believe that the most suitable option would be to invest in the new vehicles as this is the side of our company that the customer sees and feels so this is the aspect that we will be judged upon, and it is after all the customers that we are aiming to please to ensure they will keep using our buses.