Fabrice is looking to buy a new plug-in hybrid vehicle. The purchase price is $1
ID: 2808292 • Letter: F
Question
Fabrice is looking to buy a new plug-in hybrid vehicle. The purchase price is $13,500 more than a similar conventional model. However, he will receive a $6,000 federal tax credit that he will realize at the end of the year. He estimates that he will save $1,100 per year in gas over the conventional model; these cash outflows can be assumed to occur at the end of the year. The cost of capital (or interest rate) for Fabrice is 5%. How long will Fabrice have to own the vehicle to justify the additional expense over the conventional model? In other words, what is the DISCOUNTED payback period in years? Discount future cash flows before calculating payback rounded UP to a whole year.
Explanation / Answer
Additional Purchase Price = $13,500
Federal Tax Credit for 1st Year = $6,000, Cash flow for 1st year = 6,000+1,100= $7,100
Savings for each year = $1,100, from second year onward cash flow = $1,100
Cost of Capital, i = 5%
Payback Period = 3.5 Years , 4 years (approximately)
Year Cash Flow, CF Present Value = 1/(1+i)^n Cumulative Discounted Cash Flow 0 -13500 -13500 -13500 1 7100 6,761.90 -6,738.10 2 1100 2,045.35 -4,692.74 3 1100 2,995.57 -1,697.17 4 1100 3,900.55 2,203.37Related Questions
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