Greening the fleet: financial modeling for vehicle replacement in waste management

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Abstract
Our study introduces an integrated engineering-and-finance system designed to assist business decision-makers in optimizing shareholder value and environmental sustainability. Our focus centers on addressing Iren Ambiente’s challenge of transitioning to eco-friendly fuel policies for waste vehicles. While engineering and finance approach capital budgeting projects from different angles, often overlooking each other's viewpoints, our paper aims to harmonize their traditionally separate perspectives and emphasize their interdependence. To achieve this, we construct a comprehensive engineering model encompassing 2,303 inputs across five distinct “green scenarios” for vehicle replacements. Its outputs feed into a robust financial model assessing economic profitability across the five green policies. Our findings unveil a trade-off between environmental sustainability and economic value creation, portrayed by a Pareto frontier called the Net Value curve. This curve combines Net Present Value (measuring value creation) and Net Green Value (measuring CO2 emission reduction), quantifying the value the company must forgo to increase its environmental sustainability. These insights offer valuable guidance for strategic decision-making. Furthermore, the NPV-to-NGV ratio provides "shadow" prices for CO2 reduction, indicating the precise financial sacrifice for each green scenario. To further investigate the functional relation between NGV and NPV, we expand our analysis from 5 to 21 scenarios. This analysis confirms a strictly decreasing relation between NGV and NPV, and reveals an increasing marginal rate of substitution, supported by a degree-2 polynomial regression.

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