Environmental Sustainability: Capital Purchasing and Sustainability

For those of you who do capital purchasing, how often have you looked at different options with the ability to compare apples to apples? Do you take into account product lifespan or the costs in multiple replacements over the longer term? Does the system even allow you to think in such terms? For most of us, the answers to all of these questions fall into the negative.

How often do we make capital purchases based strictly on price and not factoring in sustainable practices, much less getting the item that we really need? We work in government; we do it all the time with our low-bid procurement procedures.

The question for today is, "Is the overall cost really cheaper?" How about over the life of the product? A couple of years ago, I took a class called Corporate Finance, which included a part called special problems in capital budgeting. The concept that is so very pertinent to us in the fire service is equipment replacement and equivalent annual cost. This is also known as a lifecycle cost analysis.

This concept takes into account the difference in prices for two products that essentially do the same thing. For example, say you are replacing your pick-up truck that provides logistical support for your department. You have the choice of a Ford F-150 for $30,000 or you can get a special deal for an F-250 for the same price or even less. Our city has run into this dilemma quite often, especially in years where fuel prices are very high. In this case, we assume both products can do the same job and both will last for 5 years.

Next, the annual cost to run the vehicles is factored in. This would include the maintenance and fuel cost in this case. The F-150 gets better fuel economy; according to my research, an F-150 gets about 15 MPG while the F-250 gets 10 MPG. The annual maintenance is about the same, but some sources say that the F-150 will cost a few hundred dollars less over a five-year period. With all of the above items included, an organization can calculate the total cost of ownership.

To avoid boring you with a lot of arithmetic that's a little more complex than it should be, you calculate the present value of the two products using a real discount rate, which gives you future dollars in today's terms. These values are used in calculating the equivalent annual cost. If one product has a longer lifespan than the other, the product with the longer lifespan becomes increasingly more attractive, especially in cases where multiple replacements are planned in future years.

Bottom-line: the fire service and government overall need to make sure they're using good financial information in a comprehensive manner. Taking sustainable practices into account as well can lead to better purchases with a better outcome. The analysis can't stop at the initial purchase price, but must continue throughout multiple lifecycles unless the product or program will cease to exist at some known point. All major capital purchases should be subjected to a lifecycle cost analysis with the total cost of ownership being utilized.

In my example, the F-150 costs $10,000 less in fuel costs alone, assuming 100,000 miles at $3 a gallon. All while leaving a smaller carbon footprint. Think of how this line of thought would make a financially unfeasible sustainable practice into a money saver in the longer term. If you replace the vehicle three times, the fourth vehicle is free—sort of.

Related News
  • March 28, 2019

    Whether you are already engaged with your members of Congress or have not yet ventured into the political world, now is a great time to get involved. We need you to add your voice to the discussion. read more

  • March 16, 2018

    If your patient was the Medicare Ambulance Fee Schedule, you’d be preparing to start CPR. Congress just brought us an AED and a drug box, and it’s time to get to work. read more

  • February 15, 2018

    The Community Fire Service Performance Review for Structural Fire Protection is next in ISO’s continuing effort to help communities improve their fire protection services through partnerships and training, and the ESCI report is proof of that goal. read more

You are not logged in.