Hybrid cars are touted as green alternatives; however, the financial aspects of

Question

Hybrid cars are touted as green alternatives; 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 comaprable car with a traditional gasoline engine. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model and 25 mpg for the hybrid model. Assume the appropriate interest rate is 10, 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 decsision to buy the hybrid worthwhile?

Explanation / Answer

Additional Cost 5500 Additional Annual Cost 420 Miles Per Gallon 25 Life (6) 6 Interest Rate 10% Miles Per Year 15900 At Break Even: Additional Cost = Cost Saving Per Gallon (CSPG) -5500-420*(PVIFA 10%, 6 Years) + (CSPG *15900)*(PVIFA 10%, 6 Years) -5500-(420*4.35526) + (CSPG *15900)*(PVIFA 10% 6) -5500-(420*4.35526) + (CSPG *15900)*(PVIFA 10% 6) (CSPG *15900)*(PVIFA 10% 6) = 7329.2092 CSPG *(PVIFA 10% 6) = 0.460956553 CSPG *4.35526 = 0.460956553 CSPG = 0.460956553/4.35526 CSPG = 0.105839044 Miles Per Gallon 25 Savings Per Gallon 0.105839044

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