REGARDING QUESTION 4

Question

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

Answer 1

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:

Use Double decker buses: Revenues=X and Cost=Y=61£/trip
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

Answer 2

Hello John!

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

Cheers,

Clara