You are looking at a new car and dont know whether to buyconvectional or hybrid.
ID: 2770865 • Letter: Y
Question
You are looking at a new car and dont know whether to buyconvectional or hybrid. The fact are as follows Conventional Hybrid Cost 22,000 27,000 Trade in value in 5years 13000 16,000 Annual opeartingcost 1,500 1,700 Cost permile .40 .30 interest 6% How many miles per year do you have to drive to make thehybrid break even? You are looking at a new car and dont know whether to buyconvectional or hybrid. The fact are as follows Conventional Hybrid Cost 22,000 27,000 Trade in value in 5years 13000 16,000 Annual opeartingcost 1,500 1,700 Cost permile .40 .30 interest 6% How many miles per year do you have to drive to make thehybrid break even?Explanation / Answer
We use here the concept of equivalent annual cost. Conventional PV(purchase) = 22,000 - 13,000/(1.06^5) = 12,285.64 EAC(purchase) = 2,916.57 Total annual costs = 2,916.57 + 1,500 + 0.40x (where x = number of miles per year) Hybrid PV(purchase) = 27,000 - 16,000/(1.06^5) = 15,043.87 EAC(purchase) = 3,571.36 Total annual costs = 3,571.36 + 1,700 + 0.30x (where x = number of miles per year) Solving 2,916.57 + 1,500 + 0.40x = 3,571.36 +1,700 + 0.30x yields x ˜ 8,548 So, when driving 8,548 miles per year or more, a hybrid would bethe better choice
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