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In 2005, GE released its Evolution series of locomotive engines, which delivered significant savings in fuel over the lifetime of use. It is estimated that fuel savings were roughly 1,000,000 gallons per year. At its release, GE and other competitors were selling numerous locomotives priced near $2,000,000. Show all your calculations in the questions below.

a) What is the price of the nearest comparable alternative for the GE Evolution locomotive?

b) If diesel is priced at $2.50 per gallon, what is the value of fuel savings of the GE Evolution locomotive in the first year alone?

c) Based on the fuel savings in the first year alone, what is the exchange value of a GE Evolution locomotive?

d) Suppose Union Pacific operates locomotives for 20 years and uses a discount rate of 8 percent. What is the net present value of fuel savings of running a GE Evolution locomotive over 20 years? Assume that Union Pacific takes cash flows at the end of every year when making NPV calculations.

e) Assume customers face additional maintenance costs with a GE Evolution locomotive of $200,000 per year and use the same 8 percent discount rate. What is the net present value of fuel savings of operating a GE Evolution locomotive over 20 years?

f) Based on the fuel savings over the lifetime of operation and the increased maintenance costs, what is the differential value of a GE Evolution locomotive compared to existing locomotives?

g) Based on the fuel savings over the lifetime of operation and the increased maintenance costs, what is the exchange value of a GE Evolution locomotive compared to existing locomotives?

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