Honda Accord vs. Honda Accord Hybrid Accord: 21 city, 32 highway Hybrid: 49 city
ID: 2585347 • Letter: H
Question
Honda Accord vs. Honda Accord Hybrid
Accord: 21 city, 32 highway
Hybrid: 49 city, 47 highway
1. Assuming that the average cost of gasoline over the next 10 years is $3.00 per gallon, what would your average fuel cost be each year from owning a hybrid if you drove 22,500 miles in one year?
2. What is the present value of the fuel costs if you buy a hybrid vehicle? Similarly, what is the present value of the fuel costs if you buy a traditional gasoline engine vehicle? Assume a relevant rate of 6%. Given the differences in purchase price and fuel costs, does it make sense for you to buy a hybrid? (Please show how you computed this.)
Explanation / Answer
1. Let us take the average mileage of Hybrid car since it is unknown to us how much mileage out of 22,500 car drives on highway or city.
Average mileage = (49+47) / 2 = 48 miles per gallon.
Cost of gasoline for one mile = $3 per gallon / 48 miles per gallon = $0.0625 per mile.
Miles driven each year = 22,500
Total fuel cost for each year = 22,500 x 0.0625 = $1406.25
2. Calculation of present value of fuel on hybrid vehicle
Present Value of Fuel = Total fuel cost per year x 1 / (1+6%)1+2+3+.....+10
= 1406.25 x 7.36 = $10,350
Traditional Vehicle:
Calculation of total fuel cost per year:
Average mileage = (21+32) / 2 = 26.5 miles per gallon.
Cost of gasoline for one mile = $3 per gallon / 26.5 miles per gallon = $0.1132 per mile.
Miles driven each year = 22,500
Total fuel cost for each year = 22,500 x 0.1132 = $2,547
Present Value of Fuel = Total fuel cost per year x 1 / (1+6%)1+2+3+.....+10
= 2,547 x 7.36 = $18,745.92
Whether we should buy hybrid or not is dependent upon the purchase price of vehicle and the same is not given in the question.
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