Hybrid cars are touted as a \"green\" alternative; however, the financial aspect
ID: 2781776 • Letter: H
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 $5,800 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $500 more than the traditional sedan. The EPA mileage estimate was 29 mpg for the hybrid and 21 mpg for the traditional sedan.
Gasoline costs $3.95 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.)
If you drive 16,500 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.)
Gasoline costs $3.95 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.)
Explanation / Answer
1)
NPV = 0
-5800 + 500*PV(10%,6,-1) + X*3.95*PV(10%,6,-1) = 0
-5800 + 500*4.36 + X*3.95*4.36 = 0
X = (5800 - 2177.63) / 17.2 = 210.56 miles
2)
NPV = 0
-5800 + 500*PV(10%,6,-1) + X*16500*PV(10%,6,-1) = 0
-5800 + 500*4.36 + X*16500*4.36 = 0
X = (5800 - 2177.63) / 71861.80 = 0.05 per gallon
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