Diesel or Electric: A Bus Fleet Decision
A state transport corporation must replace 40 ageing city buses. A diesel bus costs Rs 42 lakh and returns 4.5 km per litre at Rs 90 per litre. An electric bus costs Rs 68 lakh but attracts a 15% subsidy on capital cost; it consumes 1.1 kWh per km at Rs 8 per kWh, and its battery must be replaced once every 3,00,000 km at Rs 6 lakh, which may be treated as a running cost per km. Each bus in the fleet is expected to run 60,000 km a year and to be retained for 6,00,000 km. Depots are already equipped for diesel; charging infrastructure is included in the electric bus cost. The finance wing has warned that capital is rationed this year.
1. Compute the break-even distance between the two options and evaluate the choice over the full 6,00,000 km life of a bus. State the decision and its main caveat.
Read the worked answer
Running cost per km
- Diesel: 90 / 4.5 = Rs 20.00/km
- Electric: (1.1 × 8) + (6,00,000 / 3,00,000) = 8.80 + 2.00 = Rs 10.80/km
Capital cost per bus
- Diesel: Rs 42.00 lakh
- Electric: 68 × 0.85 = Rs 57.80 lakh
- Extra capital for electric: Rs 15.80 lakh
Break-even = 15,80,000 / (20.00 − 10.80) = 15,80,000 / 9.20 = 1,71,739 km ≈ 1.72 lakh km, i.e. about 2.9 years at 60,000 km a year.
Over 6,00,000 km per bus: saving = (9.20 × 6,00,000) − 15,80,000 = 55,20,000 − 15,80,000 = Rs 39.40 lakh. For 40 buses: about Rs 15.76 crore.
Decision: electrify, provided the Rs 6.32 crore of extra upfront capital (40 × 15.80 lakh) is available. The break-even is well inside the asset life, but the whole benefit is back-loaded; a corporation that is cash-constrained or may not retain the buses beyond ~2 lakh km should not treat the lifetime figure as decisive.
2. The finance wing now says only a 10% subsidy will be sanctioned. Recompute the break-even and say whether the recommendation changes.
Read the worked answer
New net capital = 68 × 0.90 = Rs 61.20 lakh; extra capital = 61.20 − 42.00 = Rs 19.20 lakh.
Break-even = 19,20,000 / 9.20 = 2,08,696 km ≈ 2.09 lakh km, about 3.5 years.
Saving over 6,00,000 km = 55,20,000 − 19,20,000 = Rs 36.00 lakh per bus.
Recommendation does not change - the electric option still pays back inside the retention period and still saves about Rs 14.4 crore across 40 buses. What changes is the margin of safety: the cushion between break-even (2.09 lakh km) and planned life (6 lakh km) narrows from 3.5× to 2.9×. That matters if kilometre utilisation falls, because lower annual running delays the payback in years, even though the break-even in km is unchanged.
3. At what diesel price would the break-even distance fall to 1,00,000 km, and why is this sensitivity worth reporting to the board?
Read the worked answer
At 1,00,000 km the extra capital of Rs 15.80 lakh must be recovered at Rs 15.80 per km:
15.80 = (diesel cost/km) − 10.80, so diesel cost/km = Rs 26.60 Price = 26.60 × 4.5 = Rs 119.70 per litre.
So a rise in diesel price from Rs 90 to about Rs 120 per litre - entirely plausible over a 10-year bus life - halves the payback distance to 1 lakh km (about 1.7 years).
It is worth reporting because the entire case rests on a price the corporation does not control. The break-even is a one-variable calculation presented as if it were a fixed fact; the board should see that the electric case becomes stronger, not weaker, under the most likely adverse scenario, while the opposite risk - a fall in electricity tariffs is unlikely and a fall in battery replacement cost only helps.