FIN 4230 Project 1 Spring 2013

Dr. D. W. Martin

Baveritt Express
NAME _____________________________
Though the situation described herein is real, this is a work of fiction. Some company and
product names are real but numbers associated with them are fictional. Specifically, the name
Baveritt does not refer to any real company in any way.
All the information you need is contained in this paper. This is an individual exercise and you
cannot consult another person. Analyze the following situation as you see fit. I encourage you to
use a spreadsheet program but it MUST be one that you wrote. Write up a report for Baveritt
Express CFO, John Bostwick. You must explain all calculations and assumptions
THOROUGHLY. For example, while you do not have to explain the logic of a financial model
you might use, you must make absolutely clear what you are doing and what each calculation
means. Do not make me look for a number or have to figure out what youre doing; state such
things explicitly. I will also grade your communication skills, your grammar, rhetoric, and logical
structure. Staple your report to this, using this page as the cover sheet.
With the recession in full force and diesel prices rising, John Bostwick was looking for ways to
reduce fuel costs on Baveritt Express current fleet of 280 trailers and 210 tractors. All company
tractors already have cab roof deflectors and side fairings but new products are coming out
constantly. The most recent industry advancement centers around what is called chassis skirts;
streamlined, aerodynamic, semi-flexible sides to deflect air around the rear tires of trailers.
Despite the fact that skirts have been
around for several years, not that many
trailers have installed them. Currently,
only about 5-6% of over-the-road
trailers have installed such skirts.
Because of this, Bostwick doubted the
claims of manufacturers about the gain in
fuel efficiency so he commissioned the
engineering firm of Material Dynamics to
examine the issue. With their help,
Baveritt bought and equipped 18 trailers
(9 long haul, 9 short haul) with three
different skirt manufacturer products (6
of each) on their three different trailer types and tested the gains in fuel efficiency. The results are
now in and the total pre-tax cost of this analysis was $102,500.
Baveritts total fleet of trailers consists of the following models: 75 Stoughton Z-plate, 99
Great Dane Super Seal, and 106 Utility 4000-DX Composite. Most of these trailers are used
for long haul over-the-road loads (65, 80, and 100 respectively) while the remainder (10, 19, and
6 respectively) are for shorter delivery runs. Material Dynamics tested the efficiency of three
models, one each for each type of trailer and haul. The three manufacturers were (1) Stehls

TrailerBlade, (2) DieselMisers AeroCurtain, and (3) Freightwings AeroFlex. Both

Baveritt and Material Dynamics were willing to assume that the current average national cost of
diesel fuel per gallon ($4.30) would remain steady in the future. Also, they assumed that
Baveritts tractor fleet of long haul trucks average 6.8 miles to the gallon and are driven an
average of 125,000 miles each year. Shorter delivery tractors average only 3.7 miles per gallon
and are driven 70,000 miles each year. With slower average speeds, of course, the advantage of
chassis skirts to shorter haul tractor trailers is much less than for longer haul rigs.
Due to different under-chassis configurations and product characteristics, the cost of installing the
various models differs from one trailer to another. Some skirts are adjustable while others are not.
Some are flexible and others are rigid. Also, the fuel savings differ because of different trailer
weights and aerodynamic qualities. Apparently, Bostwicks mistrust of company touted fuel
economy was right. Combined with Material Dynamics efficiency estimates, the following
information applies:

Base line cost per trailer (1)

TrailerBla
de

AeroCurta
in

AeroFl
ex

$
4,500

$
3,500

$
3,800

$
1,450
$
1,400
$
1,500

$
900
$
800
$
925

$
1,100
$
1,050
$
1,150

Installation cost per trailer

Lon
g

65
80
100

Z-plate
SuperS
eal
4000DX

Fuel savings first year (2)

(3) (4)
Sho
rt

10
19
6

Z-plate
SuperS
eal
4000DX

Maintenance/year per
trailer
Life (5)
Notes: 1
2
3
4
5

Long

Short

Long

Short

Long

Short

5.39%

2.80%

4.50%

2.60%

4.10%

2.75%

5.92%

2.65%

4.70%

3.05%

4.05%

3.45%

6.10%

2.84%

4.91%

2.95%

4.45%

3.12%

$
1,400
5-yr MACRS

$
550

$
600
3-yr MACRS

3-yr MACRS

TrailerBlade has best engineering, increasing cost, life, and installation

Z-Plate is heaviest,400-DX is the lightest
E.g., a 5.39% estimate means fuel costs will run only 94.61% of current amounts, etc.
Percentage fuel savings decrease by 5% each year due to tractor wear
Market value at end of tax life = zero

While looking at this data, Bostwick was reminded of what the previous CFO used to always say:

The data just cuts so many ways! A thorough analysis requires a lot of perseverance and
effort, and you cannot be surprised at what you find.
The following information has been gathered about Baveritt Express, an all-equity firm:
TIME
2008
2009
2010
2011
2012

Index RETURN
Baveritt's RETURN
Treasury rate
12 %
16 %
6%
-17
-15
4
25
28
3
18
26
3
13
8
2
Baveritt's Tax Rate = 34%
By company investment policy, each of the returns above is considered to have equal probability
and represent the entire population, not a sample. Going forward, the risk-free rate is expected to
remain at 2%.
EOY

3-year MACRS

5-year MACRS

1
2
3
4
5
6

33.33 %
44.45 %
14.81 %
7.41 %

20.00 %
32.00 %
19.20 %
11.52 %
11.52 %
5.76 %