To Purchase the Hydrovac Truck or Not?

To Purchase the Hydrovac Truck or Not?

In February of 2010, Vice President Scott Mudie of Oakville Hydro Inc. submitted an application to grant their subsidiary company El-Con $500,000. El-Con is a full service underground utility company that is owned by Oakville Hydro. Purchasing a new hydrovac truck would create a huge risk/reward scenario that could benefit both companies exponentially. The plan that Scott Mudie laid out is to front El-Con $450,000 for the hydrovac truck and $50,000 for extra costs. The truck would take 5 month from order to delivery and the plan is to order it immediately. The extra $50,000 could be used to fund costs such as the increase in two extra workers, extra gas expenses, and repair or maintenance of the truck. El-Con is currently renting a truck for roughly $150,000 annually. The two factors for Oakville Hydro to consider are to keep renting the hydrovac truck or purchase this new one that will last El-Con 8 years. Some of the pros for purchasing the truck are gaining a competitive advantage, lower project bidding, and more potential overall projects. The economy has been struggling in 2008 and 2009 but forecasts show for an immediate increase for 2010. That will also mean an increase in the housing starts, which is the target market for these companies. With high rewards there are also some serious potential risks. A few of the cons to purchasing this truck are more upfront costs, the economy continues to fall, and El-Con not being able to pay off the loan to Oakville Hydro. With all that being said, I strongly believe that the advantages of purchasing a new hydrovac truck outweigh renting it.

The three potential scenarios are best case of buying the truck, worst case of buying the truck, or continue renting the truck. If El-Con bought the truck they would expect to see internal and external sales at 5% in 2010. That will increase the total sales from $4,798,833 in 2009 to $5,038,775 in 2010. The internal sales for 2011 would be 3% and the external sales should spike to 20%. That would result in a total sales of $5,361,685. The worst case scenario is for El-Con to buy the truck and received no increase in sales. That means they would retain a total sales for 2010 and 2011 of $4,324,229. The third scenario would be if El-Con decide that renting the truck would be the best thing. Internal sales would be 5% for 2010 and 3% for 2011 but they would receive no external gains. The total value of sales would total $4,990,666 for 2010 and $5,111,521 for 2011. It is obvious that sales will continue to grow by buying the hydrovac truck. El-Con will be making yearly payments of $56,250 with 6% interest to Oakville Hydro for the loan. Then Oakville Hydro could use the extra revenue that they used to invest in El-Con to install solar panels or convert the landfills into electricity. It would be a win for both companies in the long run and satisfy the needs of both companies.

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