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 $5,400 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $460 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 $3.75 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 17,000 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 $3.75 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 17,000 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.)

Answer 1

a)

The fuel cost savings for the hybrid

=$3.75/17 - $3.75/25

=$0.070588 per mile run.

Increase in purchase cost and other owning costs for the hybrid car

=$5,400+460*6

=$8160

Number of miles to be run to make the hybrid's total cost (owning and operating cost) equal to that of the non-hybrid car

= $8,600/0.070588

= 115,600 miles.

The hybrid car should be run at least 115,600/6=19,267 miles per year for it to be worthwhile.

b)

The extra owning cost (other than fuel) for the hybrid car of $8160 should be
recovered through savings in the fuel cost for 17000 *6 miles.

So, savings per mile should be 8,160/(17000*6)=$0.08

Now 0.08 = (p/17 - p/25), where p is the price per gallon.

0.08*17*25 = 25p- 17p

34= 8p

P=4.25

c) Now the cash flows can be considered as incremental cash flows.

The initial cash outflow $5400

The yearly cash outflow is $460

The savings per year m*$0.070588, where m is the number of miles per year.

Both the alternatives should be acceptable if the NPV of this incremental
cash flows is 0.

that is, 

5400+460*pvifa(10,6)-m*.070588*pvifa(10,6)=0

5400+460*4.3553-m*0.070588*4.3553

5400+2003.44 = 0.30743m

M = 24,082 miles per year

The hybrid car should run at least 24082 kms per year 

d) 

Here, for the NPV to be zero 

5400+460*4.3553-17000*4.3553*s, where s is the savings in cost per mile for the hybrid make. 

7403.44= 74040.1s 

S= 0.010

0.10 = p/17-8/25 

0.10*17*25 = 8p

P= $5.3175