Calculating Return on Investment for Fleet Sustainability Initiatives Scott DeWees 3/13/13

Cash Flow Analysis Evaluates a scenario where cash flow is altered. Green fleet examples: – A vehicle is equipped with Start-Stop technology at an additional cost – An alternative fuel vehicle is being compared to a traditional OR an alt-fuel up-fit is being contemplated Future Savings 1 st year Investment

Does It Pencil? Many cash flow metrics available to determine the value of a project No single metric tells the whole story EX: ROI, IRR, NPV, TCO, Payback period

Questions Cash Flow Analysis Can Answer A fleet anticipates a cost saving in the future, what is it worth today? - use NPV A fleet has a choice between two vehicles, both provides lower ownership costs? - use IRR Also useful in setting or testing lease chargeback rates

Several Ways to Slice It Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

Simple Return ROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years Net cash flow at the end of the term, not corrected for inflation or present value. Bottom line: easily and quickly interpreted but lacks important information

Return on Investment The net cash flow described as a percentage of the original investment at the end of the term. Bottom line: ROI accounts for the benefits of an investment relative to the cost, but lacks important information. Allows an inherent element of comparison among multiple scenarios Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

Net Present Value The net cash flow at the end of a term, adjusted for risk and opportunity cost Bottom line: NPV is likely your best single tool for evaluating an investment, but it isn't perfect.  EX: Two investments with similar NPV’s could have different risk, or different investment costs.  NPV requires and accurate discount rate Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

Net Present Value: The Discount Rate Discount Rate Opportunity Cost / Interest RiskInflation Establishing the right discount rate can be tough. Easiest to start with Interest.

Internal Rate of Return Also known as the hurdle rate. IRR describes the maximum discount rate (or cost of borrowing) able to break even on a project. EX: you could borrow up to 11.4 percent and still break even on investment A Higher IRR is typically better Note: I’ve setup this example to make IRR and NPV to disagree about which is “Better” Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

Payback Period The period of time before the investment breaks even Poor representation of changing cash flows Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

Which is Better? Simple ReturnROINPVIRRPayback Period Investment A $90,50060%$7, %5 years Investment B $51,00034%$6, %3 years

How To Perform Cash Flow Analysis A: The hard/Important part is understanding future costs and benefits Operational costs/savings over time Residual value of a asset/investment Forecasting changing business climates (like future costs of fuel/maintenance) B: Construct a cash flow model in Excel Period (year)12345 Capital costs Operational costs/ Savings20 0 Residual value Period Total Running total

Resources for Inputs to The Model Fuels: Alternative fuels: Traditional fuels, historic and forecasts: EIA’s STEO: Vehicles + Misc: Idaho National Labs Advanced Vehicle Testing Activity : Mercury associates articles: assoc.com/resources/articles.aspxhttp:// assoc.com/resources/articles.aspx NREL case studies:

Publications from INL vehicle testing

WWCCC Cash Flow Model

Year12345 Capital expenditure $0 Vehicle incremental cost -$30,000 Reference fuel cost $20,000$20,500$21,013$21,538$22,076 New fuel cost $11,684$11,801$11,919$12,038$12,159 Maintenance savings $0 incentives / buy down $0 Fueling tax credit $0 Infrastructure depreciation $0 Depreciation $6,000$9,600$5,760$3,450 Depreciation value $600$960$576$345 Annual total -$21,084$9,659$9,669$9,845$10,263 Running total -$21,084-$11,425-$1,756$8,089$18,351 Reference fuel price$4.00$4.10$4.20$4.31$4.42 New fuel price$2.22$2.24$2.26$2.29$2.31

Converting vehicle operation into an “investment” format Step One: TCO estimate Step Two: compare initial and operational costs. Treat net costs as negative, and net savings as positive.

WWCCC: In-Development Analysis