Hybrid cars are touted as a \"green\" alternative; however, the financial aspect
ID: 2660639 • Letter: H
Question
Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a tradition gasoline engine. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model. The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model. Assume the appropriate interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years. What price per gallon would make the decision to buy the hybrid worthwhile?
Explanation / Answer
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Additional Purchase Price (A) $ 5,500.00 $ 5,500.00 Annual Ownership Costs $ 420.00 $ 420.00 $ 420.00 $ 420.00 $ 420.00 $ 420.00 $ 2,520.00 P.V of Annual Ownership Costs (B) $ 381.82 $ 347.11 $ 315.55 $ 286.87 $ 260.79 $ 237.08 $ 1,829.21 P.V of Total Costs (A + B) $ 5,881.82 $ 347.11 $ 315.55 $ 286.87 $ 260.79 $ 237.08 $ 7,329.21 No. of Gallons for traditional model = 15900/23 691.30 No. of Gallons for hybrid model = 15900/25 636.00 Increase in Price per Gallon $ 10.60 Thus increase in price of more than $ 10.60 will make the hybrid feasible.
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