REGARDING QUESTION 4

Double trouble
New answer on Apr 28, 2020
2 Answers
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John asked on Apr 28, 2020
ex Deloitte consultant

hi i do not understand this part:

"Cost per trip = (420k / 300k + 0.5) * 10 + 10,500 / 350 / 10 + 20 * 1 = £61

Difference against a double-decker = 105-61 = £44 per trip

Number of trips to payback the investment = 420k / 44 = ~9,500"

what is done with the double deck buses and why we use the difference in cost to calculate payback. Furtheremore revenu from tickets sale is not taken into account in payback calculation

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Luca
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replied on Apr 28, 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello John,

I will try to make it clear for you. Consider this question as a comparision of 2 alternatives. The first big assumption is regarding the revenues: you are gonna use the single decker bus in the routes with low number of passenger, assuming that you can serve exactly the same amount of customers with a single decker bus.
Hence you have to do the following comparision:

  1. Use Double decker buses: Revenues=X and Cost=Y=61£/trip
  2. Use Single decker buses: Revenues=X, Cost=Z=41£/trip and Bus price=420k£

The usage of single decker buses is convenient only if the cost saving (Y-Z) allows you to payback the initial investment (Bus Price) in less then 3 years:

  • Bus price / (Y - Z) = 420k£ / (61-40) £/trip = 9500 trips --> Less then 3 years --> Ok

NB: The initial hypothesis regarding the revenues is not a given, that's why there is an additional comment on the solution:

One risk to consider is the potential revenue impact due to lower capacity, hence we need to be careful when selecting routes / times to operate with a single decker.

Does it make sense?
Best,
Luca

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Yan on May 08, 2020

Thank you Luca for your explanation. I still do not understand why we use the cost saving (Y-Z) to payback the initial investment. We have the exhibit 2 - showing all the passengers in each route/hour, and we have the # of hours, and thus we can calculate the revenue per day. Assume the total number of passengers are the same after change the bus, we can have the revenue X/day. Then use 420k/(X-cost) to obtain the days (m) for payback. use m/350 to get the year.

Clara
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replied on Apr 28, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello John!

The author is in PrepL so I would suggest you to send a message directly :)

Cheers,

Clara

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Luca

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