A government funded organisation is considering replacing a small fleet of cars that are used by staff for business journeys within a developed urban area

A government funded organisation is considering replacing a small fleet of cars that are used by staff for business journeys within a developed urban area. There are two options, the first involving conventional small diesel powered cars and the second involving petrol/electric hybrids. The hybrid vehicles are more expensive but benefit from generous purchase subsidies from the national government who are keen to reduce carbon emissions. The estimated costs of purchase, maintenance and fuel for the two alternatives are as follows (per vehicle).
Conventional Diesel
Purchase Cost ; £15,000
Maintenance per annum ; £1,500
Fuel cost per annum ; £1,750
Hybrid
Purchase Cost ; £16,500
Maintenance per annum ; £1,800
Fuel cost per annum : £1,000
a) Based upon the information above, and assuming a cost of capital of 8%, is it financially worthwhile for the organisation to purchase the hybrid vehicles?. Perform your financial appraisal over a period of 5 years with the initial investment all occurring at the start of the period.
b) Discuss TWO non financial considerations that may influence the decision on what type of vehicle to purchase.
Note that the availability of a subsidy IS a financial consideration.
c) A third possibility for the required investment has been suggested.
The decision would be delayed for 1 year and would mean that all-electric vehicles could be acquired for the same cost as the Hybrid car. This option offers substantially reduced running costs, but there is only a 60% chance (probability 0.6) that a suitable electric vehicle will be
available. The electric vehicle's total annual running costs, including maintenance and fuel will be £1250 per annum. The cost of running each existing vehicle for another year before replacement is £5,000.
Prepare a decision tree to help evaluate whether it is better to delay the decision or not.
(Consider only the 5 year cost of ownership for the two vehicles when preparing your decision tree. Ignore the vehicle purchase costs).

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