Question

A car buyer is considering whether or not to spend extra for a hybrid in order to save money in the long run on gasoline expenditures. The buyer drives 25,000 km/year. The cost difference between the two vehicles is $4000, and the fuel consumption is 7.9 L/100 km for the ICEV and 5.3 L/100 km for the HEV. The cost of fuel is $0.80/L (about $3/gal). a) If the buyer expects a 5% return on this investment, and either car will last for 10 years with negligible resale value at the end of that time, what is the NPV? b) What is the NPV if the cost of fuel rises by 3% per year for the lifetime of the vehicle?

I only need part b.

need calculation for each years. Thanks

Answer 1

Answer:	Calculation of NPV:
(b)	Particulars	ICEV	HEV
	Difference in cost (a)	-	4,000.00
	Fuel consumption	1,975.00	1,325.00
		7.9*250	5.3*250
	PV of fuel cost (b)	13,821.20	9,272.45
	(from table below)
	NPV (-a-b)	(13,821.20)	(13,272.45)
	Since, NPV is less in HEV option, Hence, HEV is more economical and
	should be selected.
	Calculation of PV of Fuel cost
Year	Fuel cost/ litre	Fuel consumption	Fuel cost	PV factor @5%	PV of fuel cost
		ICEV	HEV	ICEV	HEV		ICEV	HEV
1	0.80000	1,975.00	1,325.00	1,580.00	1,060.00	0.95	1,504.76	1,009.52
2	0.82400	1,975.00	1,325.00	1,627.40	1,091.80	0.91	1,476.10	990.29
3	0.84872	1,975.00	1,325.00	1,676.22	1,124.55	0.86	1,447.98	971.43
4	0.87418	1,975.00	1,325.00	1,726.51	1,158.29	0.82	1,420.40	952.93
5	0.90041	1,975.00	1,325.00	1,778.30	1,193.04	0.78	1,393.35	934.78
6	0.92742	1,975.00	1,325.00	1,831.65	1,228.83	0.75	1,366.81	916.97
7	0.95524	1,975.00	1,325.00	1,886.60	1,265.70	0.71	1,340.77	899.51
8	0.98390	1,975.00	1,325.00	1,943.20	1,303.67	0.68	1,315.23	882.37
9	1.01342	1,975.00	1,325.00	2,001.50	1,342.78	0.64	1,290.18	865.57
10	1.04382	1,975.00	1,325.00	2,061.54	1,383.06	0.61	1,265.61	849.08
							13,821.20	9,272.45
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