Question

Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2018 Edsel 550h, which had a list price of $5,000 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $310 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 $3.00 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.) 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.) c. Gasoline costs $3.00 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.) 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.) 20.247 a. Miles per year Price per gallon c. Miles per year d. Price per gallon

Answer 1

C) The incremental cost of hybrid vs traditional sedan= One-time payment + $\sum$ annual payment = $ 5,000 + $ 310*6 = $ 6,860

Assuming Distance traveled = ' x ' Interest rate = 10%

factor of distance for hybrid in any year (A) =

xx price – per – gallon mileage - hybrid 2 (1+r)

=

τX 3 1 Σ 25 * (1+ 0.1)»

Factor of distance for Traditional in any year (B) =

2 xx price - per – gallon mileage - traditional (1 + r)n

=

αX 3 1 Σ 17 X (1 + 0.1)

x= Incremental cost of Hybrid for 6Y / (B-A)

Timeline

Period end	0	1	2	3	4	5	6
Hybrid		0.13	0.15	0.16	0.18	0.20	0.23
Traditional		0.20	0.22	0.24	0.27	0.30	0.33
Factor of Distance per year-Hybrid- A	1.06
Factor of Distance per year-sedan- B	1.56
Incremental cost of Hybrid C	$ 6,860
Savings unit (B-A)	0.50
Distance to be traveled (C / (B-A)	13,778 miles

D)

Assuming price per gallon = ' y'

Factor of gallon (A)  =

y x distance - per – year mileage - hybrid (1+r)

=

X 14.000 25 1 (1+0.1)

Factor of distance for Traditional in any year (B) =

y x distance - per – year mileage - traditional 2 (1+r)n

=

IX 14, 0001 2 17 *(1 +0.1)

y= Incremental cost of Hybrid for 6Y / (B-A)

Timeline

	0	1	2	3	4	5	6
Factor of $/Gallon Hybrid (A)	4,937.39	622.22	691.36	768.18	853.53	948.36	1,053.74
Factor of $/Gallon traditional (B)	7,260.86	915.03	1,017	1,130	1,255	1,395	1,550
Savings unit (B-A)	2,323.48
Incremental cost for hybrid (C)	$ 6,860
Price per gallon (C/(B-A))	$ 2.95