By John Hill
First Bankers
With budgets tight, it might seem tempting to repair the old apparatus rather than buy a new truck. But is this decision a prudent financial choice or simply spending good money after bad?
Bear in mind, it is imperative to maintain and repair a vehicle during its useful life, even if this means a major repair such as a transmission. The decision becomes complicated when a truck nears the end of its useful life, yet needs a major investment in repairs to reach that end.
The “good money after bad” is the ultimate question in this complex financial choice. It very well may fall to fire department leaders to justify their repair-or-replace decision before a local board that holds the purse strings.
The temptation is to place more emphasis on the initial outlay of funds. However, a quality analysis considers the big picture of this important investment decision.
Since repairing or completely refurbishing does not replace the old with the new, it is simply an investment in a decision with a shorter useful life. Replacing is an investment in a decision with a longer useful life.
Once the decision is viewed this way, the choices can be compared side by side and a financially prudent decision becomes much easier.
No rules of thumb
While it would be nice if there were a simple rule of thumb, each purchasing situation is unique. Factors such as the cost of the repairs, the cost of replacement, the useful life of a repaired truck, and the useful life of a new truck affect every situation differently.
Both repairing and replacing can make financial sense. The key is to know which choice makes the most financial sense.
A common argument made in the repair versus replace analysis is the operational argument. That’s when the decision relies solely upon non-financial factors such as availability of parts, safety, compliance or dependability.
Then, it may be followed with a short-form financial analysis that sounds like: “Well, we can repair this truck for $20,000 and it’ll be good for another five years or we can spend $300,000 for a new truck that will last for 20 years.” It seems like a choice between $4,000 per year or $15,000 per year.
A comprehensive repair versus replace analysis includes the operational factors and includes some financial data missing from the short-form analysis.
The missing data includes the financial operational costs of other repairs, fuel, insurance, out of service costs, among others. Let’s discuss these in little more detail.
Numbers breakdown
Simply repairing a truck will not recreate a new truck free of other future repairs. A comprehensive analysis will include the future repair costs that can be expected, or unexpected, during the useful life extension.
In the above example, to spend $20,000 to buy five more years of useful life is an incorrect decision if the department knows it may need other repairs. If the department leaders knew the truck would need another $10,000 repair, or even a set of tires which aren’t cheap, during this five-year period, they underestimated the true repair investment.
Also, older vehicles are less fuel-efficient. How much will it cost to continue to run a more inefficient truck for five more years? And how does an older truck affect insurance premiums? How much does an older truck cost in out of service costs?
A comprehensive analysis will put a reasonable amount for these costs.
An older truck usually has intangible costs as well. Think about what it would cost for safety, recruitment, morale, or liability to continue to use an older, repaired truck. It’s important to include an amount for all these costs in the analysis.
While may seem difficult to assign a number to something intangible as morale or safety, it can be done. If low morale from outdated equipment causes your department to lose three members per year and it costs $2,000 to recruit a replacement, then the cost of morale would be calculated as $6,000 per year. If a typical safety issue costs $1,000 and is 10% likely to happen, then an assigned cost would be $100.
The short-form financial analysis overlooked the expensive cost of lost buying power. Truck inflation can easily result in a cost of $20,000 or more each year as the truck prices rise. It’s important to include the cost of lost buying power.
Side-by side
Now that the complete costs of the repair choice have been tallied, the analysis should compare them against the cost of replacing the truck.
And replacing the truck is not a free choice either. Fire trucks are expensive and continue to become more expensive. It’s not a decision to take lightly.
The largest costs of replacing are financial. If paying from savings, the cost will be purchase price plus lost earnings. If borrowing, the cost will be purchase price plus interest.
The department’s ability to fund the new truck must factor into the decision. If the department has not saved enough or cannot afford the monthly debt payment, the best financial decision is to repair the truck to keep it operational.
Intangible costs are negligible when replacing a truck. A new truck reduces safety and liability costs and helps morale and recruitment.
Operational costs will be affected by fuel use and typically increased insurance costs.
Now that you gathered the data for the total costs of each decision, it simply becomes a matter of totaling them and putting them in a format that compares the true costs side by side.
Using this methodology, fire departments can make an informed decision based on the complete facts of the choices. They will usually save money and have more confidence.
If you’d like an Excel spreadsheet to help with the repair versus replace analysis, visit: FirstBankers.net/RepairOrReplace.