Are you thinking of bypassing a gasolinefueled car in favor of a hybrid (gasolin

Question

Are you thinking of bypassing a gasolinefueled car in favor of a hybrid (gasoline and electric) automobile? Let's take a look at the relative economics of your possible choice. The gasoline-fueled car sells for $20,000 and gets 25 miles per gallon (mpg) of fuel. The alternative hybrid vehicle sells for $26,000 and averages 69.4 mpg. The resale value of the hybrid car is $1,500 more than that of the gasoline-only car after five years of anticipated ownership. If you drive 14,000 miles per year and gasoline costs $4.00 per gallon, what is the internal rate of return on the incremental investment in the hybrid automobile? The internal rate of return is-%. (Round to one decimal place.)

Explanation / Answer

Base case: Gasoline fueled car

Savings per year = (14000/25 - 14000/69.4) x 4 = $1433.084

IRR (on incremental investment) = r

6000 = 1433.084/(1 + r) + ... + 1433.084/(1 + r)5 + 1500/(1 + r)5

Solve for 'r':

r =12.1%

Year Incremental cost ($) Incremental Cash flows ($) 0 6000 1 1433.084 2 1433.084 3 1433.084 4 1433.084 5 2933.084

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