Question

Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2014 Edsel 550h, which had a list price of $5,900 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $400 more than the traditional sedan. The EPA mileage estimate was 25 mpg for the hybrid and 17 mpg for the traditional sedan. a. Assume that gasoline costs $3.45 per gallon and you plan to keep either car for six years. How many miles per year would you need to drive to make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 32.) Miles per year b. If you drive 14,000 miles per year and keep either car for six years, what price per gallon would make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per gallon c. Gasoline costs $3.45 per gallon and you plan to keep either car for six years. How many miles per year would you need to drive to make the decision to buy the hybrid worthwhile? Assume the appropriate interest rate is 10 percent and all cash flows occur at the end of the year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Miles per year d. If you drive 14,000 miles per year and keep either car for six years, what price per gallon would make the decision to buy the hybrid worthwhile? Assume the appropriate interest rate is 10 percent and all cash flows occur at the end of the year. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per gallon $

Answer 1

Total Incremental Cost = Incremental Buying Cost + Incremental Annual Cost

= 5900 + (400*6) = 8300

Annual Spends if plan to keep the car for 6 years = 8300 / 6 = 1383.33

Mileage for Hybrid is 25 mpg

Mileage for Traditional is 17 mpg

Ans a) 21301.33

if we drive both the cars for 16168.48 km cost for each car is -

Hybrid is 21301.33/ 25 * 3.45 = 2939.58354

Traditional is 21301.33/ 17 * 3.45 = 4322.91697058824

Difference is 1383.33 (Rounding to 2 decimal ) is same as incremental cost

Ans b) 5.25

Hybrid is 14000 / 25 * 5.25 = 2940

Traditional is 14000 / 17 * 5.25 = 4323.53

Difference is 1383.53

So at 5.25 (rounded off) buying hybrid is worthwhile.

Ans c) 27030 km

at 27030 km we would save 1755 per year 400 annual incremental cost = net flow 1355

present value of 1355 for 6 years flow is = 5901.3

C=Initial cost is 5900 so here NPV is Zero hence buying decision can be taken.

Refer table below for more detail

Ans d) 6.66

14000/25 = 560 *6.66= 3729.6

17000/17=823.5294 *6.66 = 5484.706

Difference is 1755

Refer table below for more detail

	0	1	2	3	4	5	6
Cost	5900
Annual Spens		400	400	400	400	400	400
		1755	1755	1755	1755	1755	1755
		1355	1355	1355	1355	1355	1355
	5901.378	1231.818	1119.835	1018.032	925.4832	841.3484	764.8622