W5_ANG_Student Pick-up Service


Problem Statement

In the middle of FAT activity in Dallas-TX, I’ve just got idea to use student pick-up service for the case contributing for Simatupang AACE 2014 blog. This case was triggered that my wife is tired with the traffic to accompany and pick up my daughter every day to her school and then planned to use student pick up service to school. She has checked the rate for go and forth is not expensive; it’s only IDR 500,000 per month so then across in my mind, is this business profitable with that level of price?

The type of car that the pick-up service use is Suzuki “Carry” minibus year 1995 that carries max 8 passengers and I checked on internet the good condition of 2nd Suzuki ‘Carry” year 1995 price IDR 46,000,000 now. So with this basis assumption, I try to assess the projected rate of return of this student pick-up service.


Other assumptions made are:

  • 2 shift per day for morning and afternoon class
  • The pick-up only covers nearby my neighborhood, so the service price assumed the same no much different on the fuel consumption for the additional student/ passenger.
  • Projected for 2 years operation (24 months)
  • “All Risk” insurance car: 3% from purchased price.
  • Assumed the car will be sold at the end of investment the decreasing value is assumed IDR 2,000,000 per year (very conservative)

Feasible Alternatives

The feasible alternatives are simple; proceed with the business if the projected rate of return is above minimum attractive rate of return (MARR) and decline it if not.

On this business projection, I put three scenarios for the : 1st pessimistic with only 3 students use this service per shift, 2nd most likely with 5 students per shift (conservative that actually most likely is 5-6 students per shift) and 3rd optimistic with occupied maximum or 8 passenger per shift.

Outcomes/ Calculations of Each Alternative

Based on above assumption, I make calculation rate of return as follows:


Note: for the calculation of rate of return, I use spreadsheet formula: =rate(nper,pmt,pv,fv).

Setting Minimum/ Selection Criteria

Assumed the minimum attractive rate of return (MARR) is 15% to cover inflation rate, opportunity cost and business risk.

Analysis/ Comparison of the Alternatives against the Criteria

As shown above, the result is surprising to me that with the level of service price, the projected rate of return is above MARR, even for pessimistic scenario.

Selection of the Best/ Preferred Alternative Compared against the Criteria

Based on this assessment, the student pick-up service is profitable and quite promising; the projected rate of return is above MARR.

Performance Monitoring and Post Evaluation of Result/ Follow up Assessment

The fuel cost assumed in above calculation using the current “premium” type of fuel that so far the price is subsidized by government.

The low price of subsidized fuel/ gasoline may the reason why with that level of price, the business is still profitable.

But I believe the customer will understand if the fuel price increase and the price of student service pick-up service adjusted up.

References :

  1. Sullivan, William G., Wick, Elin M., Koelling, C. Patric. (2012), Engineering Economy. 15th ed. Chapter 14: Decision Making Considering Mutiattributes, page 551-573, USA: Pearson Higher Education, Inc.
  2. Amos, Scott PE. (2012), Skill & Knowledge of Cost Engineering. 5th ed., USA: AACE International.
  3. Humphreys, Gary C. (2002), Project Management Using Earned Value. 2nd ed., USA: Humphreys & Associates, Inc.
  4. Bursa Kendaraan (2013). Carry Adiputro 1995. [ONLINE] Available at: http://kendaraan.trovit.co.id/. [Last Accessed 24 Sept 2013].
  5. Asuransi Mobil (2013). Tarif Premi Asuransi Kendaraan Bermotor. [ONLINE] Available at: http://mitraca.com/. [Last Accessed 24 Sept 2013].
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2 Comments

Filed under Anggono M, Week 05

2 responses to “W5_ANG_Student Pick-up Service

  1. Hi Pak Anggono,
    GREAT case study (looks like this class is VERY entrepreneurial?) and you set it up very well using our 7 step process, BUT…….

    There are two concerns I have- you based the business case on 25 days per month X 24 months? How did you come up with that as the basis for your business case analysis? According to my research, Indonesia has 244 days of school per 365 day year. http://fullfact.org/factchecks/longer_school_days_shorter_holidays-28881 So my first challenge to your calculations is whether you should be basing your business case on 25 days per month (300 days per year) or the actual working days of 244?

    The second challenge I have (not just for you but for everyone doing these kinds of problems) is where did the 15% rate of return come from? It is very important (ESPECIALLY for the SSK Migas guys!!) that you know how to calculate the WACC and MARR. I am not saying your 15% is wrong, but it is NOT a number you should just assume. It is a calculated number that is just as important as the rest of the calculations are. Even more so, because if the MARR is set wrong, then the rest of the decision making process is also flawed. (Garbage In/Garbage Out)

    Bottom line- you picked an outstanding case study but didn’t invest the kind of CRITICAL THINKING SKILLS I am expecting to see you develop. Sure, you ran the numbers but the real challenge is whether the numbers MAKE ANY SENSE?

    I will accept this but would urge you to take this same case study and develop it more for future weeks…. Show us where the 15% MARR came from. Show us the IRR, the ERR and Simple Payback calculations in addition the NPV. Explain to us which of these methods is most realistic and why…..

    In the meantime, enjoy Texas. This is probably the best time of year there.

    BR,
    Dr. PDG, Jakarta

  2. Dear Doc. Paul,

    I understand your concern. but then in this week working load, I just targeted to step ahead schedule on Blog then I can focus on my paper when I am back to Jakarta next week.
    Thanks a lot for accepting my W5 & W6, although it does not meet fully your requirements.

    Best Regards,
    Anggono 7 am in Dallas-TX

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