One of the most difficult decisions to make as a fleet owner is when to turn your equipment, and this decision can have significant impacts on your profitability and cash flow.
For our first entry into our blog we are going to discuss how we go about calculating the best time to trade in your truck, and provide you with some tools which we hope you will find helpful to calculate the best time to trade your equipment based on how your fleet is currently operating.
*** Note - Use the filters on the left hand side of the below curves to get results which will match how your operate your fleet. The filters do not automatically carry over from one graph to the other two, so you will need to update the filters on each graph.
Below you will see four graphs which all combine to form the Capital Costs associated with a new truck
Principal Due for Initial Truck Purchase
This graph calculates the amount you will owe after each month after your initial purchase of your current truck. This graph takes into consideration the initial purchase price, loan term in months, and interest rate.
Resale Value for Initial Truck Purchased
This graph calculates the amount you can theoretically get for your current truck on the resale market. This graph takes into consideration the initial purchase price, an input by you for when you typically resell your trucks, and an estimate by you for how much you expect to sell the truck for at this future date as a percentage of initial purchase price. The graph has a curve built into the resale calculation based on the belief that the truck will depreciate at a greater rate early in its useful life.
New Truck Purchase Price
This graph calculates what we can predict the value of a new truck to be in the future. This graph takes into consideration your initial purchase price of a truck bought today, and an input by you for the annual new truck price increase.
Capital Cost of New Truck Purchase
This graph combines the three other graphs into one; where the Capital Cost in any future month is equal to the Principal Due for Initial Truck Purchase + New Truck Purchase Price - Resale Value for Initial Truck Purchased.
Effects of Fuel Efficiency Improvement
Below you will see two graphs which all combine to form the Capital Payment associated with a new truck
Monthly Cost Savings Due to Fuel Efficiency Improvements
Most Truck OEMs have a goal to improve the fuel efficiency of their vehicles by 1-3% per year. This graph calculates the monthly amount you will save for trucks purchased in the future due to annual fuel efficiency improvements on New Trucks. The graph has a curve built based on your inputs for your annual miles traveled, the fuel efficiency of your current truck, and the anticipated annual fuel efficiency improvement of future trucks.
Capital Payment per Month
This graph calculates the estimate for the cost of acquiring a new truck in the future. This graph has a curve built based on your inputs which were used to calculate the Capital Cost of a New Truck Purchase above, which is then used to calculate a capital payment based on your traditional loan terms. Once we calculated the Monthly Capital Cost, we then subtract the monthly fuel cost savings of a new truck to get to the Capital Payment per Month.
When to Purchase New Truck
Below you will see one graph which will be used to estimate when is the ideal time to trade in your existing truck for a new truck. There are two curves on the graph below; Monthly Payment for Truck Purchased This Month, and Monthly Cost for Maintenance
Monthly Payment for Truck Purchased this Month
This curve is the same as the Capital Payment per Month from the graph above.
Monthly Cost for Maintenance
This curve calculates the estimate for the monthly cost that you can expect to pay for your current truck as it ages. The curve takes into consideration your input for the Maintenance Cost per Mile for the first 50K miles of the truck's ownership and your input for the Percent Increase in Maintenance Cost per Mile Every 50K Miles. I recommend that you manipulate these two values until you get a reasonable comparison to your actual Maintenance Cost per Mile curve.
WHEN TO TRADE IN
Based on the below curves we say that you should look to trade in your existing Truck as soon as your Montly Cost for Maintenance is greater than your Monthly Payment for Truck Purchased this Month. This is based on the idea that you should choose to operate the truck which will cost you the least amount to operate per month on a cash flow basis.
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