QUESTION 4Partilly correct 4.95 points out of 6.60Flag question Payback Period a

Question

QUESTION 4Partilly correct 4.95 points out of 6.60Flag question Payback Period and NPV of a Cost Reduction Proposal-Differential Analysis Hermione decided to purchase a new automobile. Being concerned about environmental issues, she is leaning toward the hybrid rather than the gasoline only model. Nevertheless, as a new business school graduate, she wants to determine if there is an economic justification for purchasing the hybrid, which costs $1,595 more than the regular model. She has determined that city/highway combined gas mileage of the hybrid and regular models are 30 and 24 miles per gallon respectively. Hermione anticipates she will travel an average of 12,000 miles per year for the next several years. Round your answers to two decimal places.) (a) Determine the payback period of the incremental investment if gasoline costs $2.75 per gallon. 5.8 years (b) Assuming that Hermione plans to keep the car six years and does not believe there will be a trade-in premium associated with the hybrid model, determine the net present value of the incremental investment at an six percent time value of money. (Use a negative sign with your answer.) (242.72) c) Determine the cost of gasoline required for a payback period of three years $ 5.32 per gallon d) At $4.60 per gallon, determine the gas mileage required for a payback period of three years. 30.67 x miles per gallon Check

Explanation / Answer

1

Savings=-12000/30*cost of gasoline+12000/24*cost of gasoline=100*cost of gasoline=275

So, payback period=1595/275=5.8

2

NPV=-1595+275/1.06+275/1.06^2+275/1.06^3+275/1.06^4+275/1.06^5+275/1.06^6=-242.72

3

For payback of 3 years, 1595/3=savings per year

Hence,1595/3=100*cost of gasoline

So, cost of gasoline=1595/300=5.32

4

For payback of 3 years, savings per year=1595/3

Savings per year=-12000/mileage*cost of gasoline+12000/24*cost of gasoline=(-12000/mileage+500)*cost of gasoline=(500-12000/mileage)*4.6

Hence, (500-12000/mileage)*4.6=1595/3

=>mileage=12000/(500-1595/(3*4.6))=31.21 miles per gallon

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