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This is somewhat of a loaded question and there are a lot of different ways to handle the end of a vehicle’s service. Being a pragmatist myself, view a company vehicle as a tool to do a job. I know that comparing a $40,000 truck to a $100 power drill at first seems crazy, but if you ignore the cost difference you will see that, to a business, both are simply a tool to get a job done. The truck is used to get people and equipment from place to place safely and the drill is used to… drill.
I am going to break down the numbers and show you a way to help you decide if it is time to replace that old vehicle or, for larger companies, how to shape your company’s vehicle replacement policy.
One of the most important things when managing a fleet of any size is understanding cost of ownership. This is all cost associated with owning a specific piece of equipment, in this case a vehicle, over a course of time. I like to break down the cost of ownership to a yearly cost. You can break this down monthly if you like, but I have found that is usually unnecessary. Let’s break down a typical scenario of a cleaning and restoration van. This van is used to transport a team of two people and some high tech cleaning equipment to customers’ homes to perform in-depth cleaning services. Below are categories and generic values for this hypothetical cleaning and restoration company.
Van Monthly Payment ($550 per month x 12mo) = $6600 CPY (Cost Per Year)
Insurance ($150 x 12mo) = $1800 CPY
Gas ($375 per month) = $2250 CPY
Maintenance/Repairs ($50 per month) = $600 CPY
Just looking at the data this way, you can see that some of these numbers will fluctuate from year to year. For example, the monthly payment will go to $0 when the vehicle is paid off, and the maintenance and repair will increase as the vehicle ages.
There is one more factor to take into consideration, if this vehicle is used to produce income, which in this case is true. Without the van the crew will not be able to perform the cleaning task. When maintenance and repair cost go up so does the amount of down time a vehicle experiences. Let’s take a look at some simple math to figure out how much the van being down for one day costs in potential revenue. This will look very different depending on the type of business, but we will be doing this for the example cleaning and restoration company.
Averaged billed per job = $350
Average jobs per day = 3
Average revenue per day = $1,050
In this case, let’s say maintenance and repairs add up to a total of two days in the shop per year. These will be days that you could have been making money, so you have to add the $2,100 missed to the cost per year equation. So now our total cost per year for our cleaning and restoration van is $13,350.
Now let’s compare those numbers to the same vehicle but six years down the line, when the vehicle is paid off but it also has 140,000+ miles and all of the maintenance and repairs that go with that. Let’s break down the numbers and see what it might look like.
Van Monthly Payment = $0 CPY
Insurance ($150 x 12mo) = $1800 CPY
Gas ($375 per month) = $2250 CPY
Maintenance/Repairs ($175 per month) = $1800 CPY
Down Time (7 days @ $1,050 per day) = $7,350
Total Cost Per Year – $13,200
As you can see, this example is showing that even though, after five years, you are saving over $6,000 on the vehicle because you are not making monthly payments to the bank, the annual savings is only $150. This vehicle would be at a break-even point where it costs about the same to maintain the old vehicle as it would to purchase a new one. Also keep in mind that the maintenance and repair cost will keep increasing from this point as well, and in the long run operating an old vehicle that requires constant maintenance will end up costing you much more than purchasing a new one.This example shows the largest cost per year savings, as the vehicle is paid off and the maintenance cost will only increase from this point on.
The first chart we will look at is a company that never replaces a vehicle over a ten year period. The graph climbs steadily until the vehicle is paid off beginning of year six where the cost per year drops but increases regularly every year after that, it takes only two more years before the maintenance and repair cost eats up all of the savings made by paying the vehicle off. The total cost of ownership for a ten-year period on this vehicle is $161,875. Not only that, but now you have a ten-year-old company vehicle With a low resale value as well.
In contrast, this graph shows the same vehicle but on a five-year replacement policy. The chart increases steadily for the first 5 years and drops in year six, when a new vehicle is purchased. Because the vehicle is only five years old, it should be worth about half of its original value. At this time you don’t owe anything on the asset, that money can be put into the new vehicle. This can lower the monthly payment drastically. Vehicles on average increase in price about 2% per year. Even with the monthly payment increasing for the vehicle itself, the decrease in maintenance and downtime will put this person in a better position. Total cost of ownership in this situation is $135,900 over ten years, almost $26,000 less than the previous example.
This last example is a vehicle that is on a three-year replacement schedule. This is by far the best way to keep your maintenance and downtime cost low. Again, the graph dips in the year that a new vehicle is purchased, but this situation is a little different than the one before. Since this vehicle is not paid off with the bank, there is not as much equity to lower the payment as much as the last example, but again if you use the equity in your vehicle to purchase a new one, you can actually decrease the monthly cost. Even with the increase of new vehicle costs, the ability to keep the vehicle on the road far exceeds that. This example would cost $130,403 over 10 years. That is a $5,000 savings over the five-year replacement example and almost $16,000 over the first example.
Always remember that just because a vehicle is new does not mean that it will not have problems. It is possible to have a ten-year-old vehicle that is more reliable than a brand new vehicle, but on average, over the thousands of vehicles we have managed, these examples show the average we have found.
We are full of information like this at Cooper Fleet Services to help you better manage your company vehicles. Please feel free to reach out to us if you have any questions.
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