Prepared by Group 3 :Budi, Hairul, Hakiki, Jovan, &

Tamara

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

Full-size Bus MinibusAcquisition cost per bus (year 0) (90,000)$ (27,000)$ Salvage value per bus (year 0) 15,000 -Initial cost (redesign route, inform public,

install caution signs, retrain drivers) (year 0) - (15,250)

Drivers compensation per person (yearly) (18,000) (18,000) Operating & Maintenance cost (yearly) (50,000) (20,000)

Chartering buses cost (yearly)Hurdle rate 12%

$ (30,000) / $ (5,000)

BLUE RIDGE SCHOOL DISTRICTAlternative Data on Replacing Buses

MAIN ALTERNATIVESReplace five full-size buses with eight minibuses or not?

Hurdle rate 12%

Purchase Minibuses (Sell full-size buses)Year 0 1 2 3 4 5Acquisition of minibus (eight buses) @ (27,000) (216,000) Operating & Maintenance cost :

Full-size bus (five buses) 250,000 Minibus (eight buses) 160,000

Cost saving 90,000 90,000 90,000 90,000 90,000 Incremental driver compensation cost (54,000) (54,000) (54,000) (54,000) (54,000) Re-routing cost (15,250) Total cashflow (231,250) 36,000 36,000 36,000 36,000 36,000 Present value (231,250) 32,143 28,699 25,624 22,879 20,427

Net present value (101,478) Sell full-size buses (five buses) @ 15,000 75,000$ Total NPV (26,478)$

BLUE RIDGE SCHOOL DISTRICTPurchase Minibuses & Sell Full-Size Buses (Incremental-Cost Approach)

TWO OPTION

Sold five full-size buses immediately or keep it as a reserve?

Hurdle rate 12%

Sell the full-size busesSales of five full-size buses 75,000

Annual savings on bus charter1 2 3 4 5

Charter cost : before 30,000 30,000 30,000 30,000 30,000 Charter cost : after 5,000 5,000 5,000 5,000 5,000 Annual saving 25,000 25,000 25,000 25,000 25,000 Present value 22,321 19,930 17,795 15,888 14,186 Net present value 90,119 Difference in NPV 15,119$

BLUE RIDGE SCHOOL DISTRICTSell or Keep The Five Full-Size Buses

TWO OPTION CONTINUED

Hurdle rate 12%

Purchase Minibuses (Keep full-size buses)Year 0 1 2 3 4 5Acquisition of minibus (eight buses) @ (27,000) (216,000) Operating & Maintenance cost :

Full-size bus (five buses) 250,000 Minibus (eight buses) 160,000

Cost saving 90,000 90,000 90,000 90,000 90,000 Chartering buses cost:

Sold Full-size buses 30,000 Keep Full-size buses 5,000

Cost saving 25,000 25,000 25,000 25,000 25,000 Incremental driver compensation cost (54,000) (54,000) (54,000) (54,000) (54,000) Re-routing cost (15,250) Total cashflow (231,250) 61,000 61,000 61,000 61,000 61,000 Present value (231,250) 54,464 48,629 43,419 38,767 34,613

Net present value (11,359)$

Purchase Minibuses & Keep Full-Size Buses (Incremental-Cost Approach)BLUE RIDGE SCHOOL DISTRICT

Assuming Cost of Maintenance of full-size buses remain zero

INTERNAL RATE OF RETURN

• 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

Sell Full-bus Keep Full-busHurdle rate:Positive NPV ( 4% & 9% ) 4,016 6,019 Negative NPV ( 5% & 10% ) (389) (12)

Internal rate of return 4.02% 9.02%

Trial & Error on IRRBLUE RIDGE SCHOOL DISTRICT

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.

ETHICAL ISSUE CONTINUED

• Of course Mr. Reynolds should not offering Mr. Jeffries the future vacant position in return for a business opportunity. It’s not only un-ethical but if it is one day proven, it can be considered a collusion which violates the law.

• Mr. Reynolds should not putting his friend in a difficult position where Mr. Jeffries can be jeopardized by his action.

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.