A financial model was required to evaluate the supply of fully maintained cars versus payment of a car allowance to 164 employees

The Situation –

In April, 2013, Solutions Marketing was approached by a specialist GST accountant to assist with building a financial model for a large Sydney Council. This Council had provided 164 cars to its key employees, replacing them every two years. They planned to switch their employees to a car allowance system, thereby saving the Council substantial costs whilst not disadvantaging their employees. How wrong they would be! On both counts!

How Solutions Marketing helped –

We realised that there were 3 components necessary to be built into the model:

1. Cost to the Council of purchasing the car, running expenses based on average mileage travelled, and then trading it in after 2 years at an average salvage value. In addition Fringe benefit tax was payable based on the statutory 20% rate and an employee leaseback payment contribution was to be credited as income to the council. Also a Council Cost of Capital of 6.0% was included
2. Cost to the Council of paying a planned car allowance of $13,500pa. (Inclusive of Super guarantee), plus 0.5% Workers Compensation. Other factors included a lease finance rate of 7%, an additional purchase cost of 10% due to non-applicability of a Council Fleet discount and an Opportunity cost of capital for the individual of 7.0%
3. Determination of the car allowance amount that did not disadvantage the employee compared to the existing provision of a fully maintained car to employees

Other factors that needed to be built into the model were a CPI rate of 2.5% pa, and various GST implications related to buying & selling the car and also its running costs. Finally, we decided to extend the model to compare the existing 2 year car replacement scenario with a 3 year and a 5 year scenario.

The Council was able to supply historical data re average purchase costs, salvage values, running costs, average mileage and employee contributions.

 The Result –

Cost to Council - per car per month
	Existing model - Fully maintained car provided	The following 2 results are only achievable if the total staff savings are as below	Cost to Council if Planned car allowance $13,500pa	Cost to Council if Car allowance increased to not disadvantage the employee
2 year scenario	-$1,009	$0k pa	-$1,102	-$1,384
Index	100		109	137
3 year scenario	-$933	$0k pa	-$1,103	-$1,245
Index	100		118	133
5 year scenario	-$833	$0k pa	-$1,105	-$1,061
Index	100		133	127

Assuming no staff savings, the best result for Council is to maintain the existing provision of a fully maintained car, but extend the holding period to 5 years or at least 3 years. 

Note that the computed Council cost pa is slightly lower than the planned $13,500 car allowance, because this allowance is first increased by 0.5% workers compensation payable by the Council, then divided by the Council cost of capital to arrive at a Net Present Value (NPV) for each year, then converted to a monthly annuity payment to enable equivalent month comparisons across the different time periods of 2, 3, and 5 years

Cost to Council - per car per month
	Existing model - Fully maintained car provided	The following 2 results are only achievable if the total staff savings are as below	Cost to Council if Planned car allowance $13,500pa	Cost to Council if Car allowance increased to not disadvantage the employee
2 year scenario	-$1,009	$190k pa	-$1,008	-$1,290
Index	100		100	128
3 year scenario	-$933	$344k pa	-$933	-$1,074
Index	100		100	115
5 year scenario	-$833	$548k pa	-$833	-$789
Index	100		100	95

It is unlikely that the full extent of the above staff savings could be achieved and even if achievable, employees would on average be disadvantaged unless a 5 year hold period was adopted. 

The Recommendation –

Stay with the existing provision of a fully maintained car but extend the hold period from 2 to 3 years 

Want to know more? Contact Tony Nix on 02 9955 5133 for an obligation free discussion about our Excel modelling methodology. In our research we dedicate ourselves to uncovering key market insights. In our analysis & strategy planning we aim to find solutions 'beyond the obvious!' Our offer is simply 'more for less' - more consumer insight for less cost ...guaranteed!