Instructor: Aleksi Aaltonen, Section 002

Giving up the wheel

Justin Rowlatt of the BBC looks at various valuation metrics related to Uber’s entrance into the driverless electric car market.  Rowlatt postulates that Uber is in an advantageous position to reduce transportation costs and gain a positive net present value from their investments. He cites the driverless format as having the potential to cut transportation costs by 50%. Additionally, Rowlatt points out that electric engines extend the life of the vehicle and cost less to maintain because they have fewer parts. He believes electric engines will reduce costs by another 40%.

He notes that profits from this investment depend on regulatory approval from government entities. By assigning a probability of reaching this approval over the three years, we can find the net present value of investments Uber would make. Using the industry standard as an example, the investment for driverless car technology costs $1.1 billion. Add another $500 million for an electric car fleet, and the total investment is $1.6 billion. With a 90% reduction in costs, Uber would have 1.7 billion in savings per year assuming the U.S. government provides regulatory approval. If we put the odds of approval at 0% in year 1, 50% in year two, and 100% in year three with a discount rate of 12%, the net present value equals $420 million, making this a good investment for Uber.

2 Responses to Giving up the wheel

  • This is a very interesting attempt to estimate the business case for driverless cars. We of course do not know what happens but this way it is possible to see what are the key variables and how they should look like for driverless cars to make a breakthrough. Uber could also try shape these variables if it believes in the scenario, e.g. there is for sure heavy lobbing going on to change the regulation. Should Uber and Lyft join forces to make it happen and create a new market for both companies?

  • Making a financial case for driverless cars is definitely a unique way to look at it. I do believe however that the technology for driverless cars will outpace people acceptance of them. In other words its probably going to take a while to have regulatory approval for commercial or general use of driverless cars. There has been a lot of setbacks recently especially the recent death of an apple employee using the hands free function of his Tesla. The idea of machines being charge makes people feel less safe on the road even though in reality the opposite may be the case.

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