How to compare two options and evaluate cost efficiency

cost saving
New answer on Mar 11, 2020
3 Answers
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Anonymous A asked on Mar 08, 2020

I would like to know how to compare the below two options. My confusion point is that the price is different. What would be a recommended method to evaluate these two options given that the price is different? Is it recommended to "depreciate" the price according to the life span so that we could get the total cost per year, and then compare the total cost per year of the two options?

1. Option one: standard truck

Purchase price $100,000

Maintainance / year: $5000

Insurance / year: $2000

Avg. Miles driven / year: $60,000

Miles per gallon: 10

Lifespan: 10 years

Fuel cost: $3 per gallon

2. Option two: hybrid truck

Purchase price $150,000

Maintainance / year: $8000

Insurance / year: $3000

Avg. Miles driven / year: $60,000

Miles per gallon: 20

Lifespan: 10 years

Fuel cost: $3 per gallon

(edited)

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Luca
Expert
Content Creator
replied on Mar 11, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Dear anonymous,

Am I wrong or there are some parts missing? In order to compare the two options we need to know how much kilometers I would do using the fuel or the battery in the second option.

Anyway your approach is fine and it would work. Another option is to calculate the annual difference between the 2 options ( € spent with option 1 - € spent with option 2 ) and then to multiply this difference for the number of years. Finally, you compare this total saving with the difference in terms of purachase prices.

Feel free to text me if you want to discuss it further,
Luca

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Clara
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Content Creator
replied on Mar 09, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

For this particular case, I would even build the graph of costs during the lifespam since it´s a super easy and graphic way to see where the break-even point between both cars are.

Hope it helps!

Cheers,

Clara

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Robert
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replied on Mar 09, 2020
McKinsey offers w/o final round interviews - 100% risk-free - 10+ years MBB coaching experience - Multiple book author

Hi Anonymous,

Unless any special instructions given or clarified with your interviewer, I would also depreciate the purchase cost over the respective life-span in order to compare the 2 options. Otherwise, you could not compare the 2 options (assuming that initial capex should be included in the comparison, and not only ongoing operational cost).

Bonus: A follow-up question might be if the 10 year lifespan is accounting depreciation period, or real lifespan of the vehicle.

Hope that helps - if so, please give it a thumbs-up with the green upvote button below!

Robert

Hope

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