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 $5,300 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $450 more than the traditional sedan. The EPA mileage estimate was 30 mpg for the hybrid and 22 mpg for the traditional sedan.

  

a.

Assume that gasoline costs $3.70 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.)

  

Miles per year

   

b.	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, ignoring the time value of money? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Price per gallon

$

c.

Gasoline costs $3.70 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.)

   

Miles per year

d.

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.)

Price per gallon

$

Answer 1

Answer:

a.

The No. of Miles per year for hybrid is 29,695.62

b.

The price of per gallon is $6.67

c.

The No. of Miles per year is 37,125.

d.

the price of per gallon is $8.33

Explanation:

Part - a:

Computation the No. of Miles per year is:

No. of Miles per year = No. of Miles per year for non-hybrid / No. of periods

= 178,173.72 / 6

= 29,695.62

Hence, the No. of Miles per year for hybrid is 29,695.62

Working Notes:

1.

Computation the cost of traditional sedan is:

Cost of traditional sedan = Cost of gasoline / Estimated mpg of traditional sedan

= $3.70 / 22

= $0.1682

Hence, the cost of traditional sedan is $0.1682

2.

Computation the cost of hybrid is:

Cost of hybrid = Cost of gasoline / Estimated mpg of hybrid

= $3.70 / 30

= $0.1233

Hence, the cost of hybrid is $0.1233

3.

Computation of cost savings for hybrid is:

Cost savings for hybrid = Cost of traditional sedan - Cost of hybrid

= $0.1682 - $0.1233

= $0.0449

Hence, the cost savings for hybrid is $0.0449

4.

Computation the value of increased purchase is:

Value of increased purchase = (Expected cost * No. of periods) + List price of hybrid

= ($450 * 6) + $5,300

= $2,700 + $5,300

= $8,000

Hence, the value of increased purchase is 8,000.

5.

Computation the No. of Miles per year for non-hybrid is:

No. of Miles per year for non-hybrid = Value of increased purchase / Cost savings for hybrid

= $8,000 / $0.0449

= 178,173.72 Miles

Hence, the No. of Miles per year for non-hybrid is 178,173.72 Miles.

Part - b:

Computation the price of per gallon is:

Cost of savings per mile = (Price of per gallon / Estimated mpg of traditional sedan) - (Price of per gallon / Estimated mpg of hybrid)

$0.0808 = (Price of per gallon / 22) - (Price of per gallon / 30)

$0.0808 * 30 * 22 = 30 Price of per gallon - 22 Price of per gallon

8 Price of per gallon = $53.328

Price of per gallon = $6.67

Hence, the price of per gallon is $6.67

Working Notes:

1.

Computation the value of increased purchase is:

Value of increased purchase = (Expected cost * No. of periods) + List price of hybrid

= ($450 * 6) + $5,300

= $2,700 + $5,300

= $8,000

Hence, the value of increased purchase is 8,000.

2.

Computation the cost of savings per mile is:

Cost of savings per mile = Value of increased purchase / (No. of miles per year * No. of periods)

= $8,000 / (16,500 * 6)

= $8,000 / 99,000

= $0.0808

Hence, the cost of savings per mile is $0.0808

Part - c:

Computation the No. of Miles per year is:

List price of hybrid + (Expected cost * PVIFA(10%, 6years) - (No. of Miles per year * cost savings for hybrid * PVIFA(10%, 6years) = 0

$5,300 + ($450 * 4.3553) - (No. of Miles per year * $0.0449 * 4.3553) = 0

$5,300 + $1,959.885 - (No. of Miles per year * $0.19555297) = 0

- (No. of Miles per year * $0.19555297) = -$7,259.885

No. of Miles per year = $7,259.885 / $0.19555297

No. of Miles per year = 37,125

Hence, the No. of Miles per year is 37,125.

Working notes:

1.

Computation the cost of traditional sedan is:

Cost of traditional sedan = Cost of gasoline / Estimated mpg of traditional sedan

= $3.70 / 22

= $0.1682

Hence, the cost of traditional sedan is $0.1682

2.

Computation the cost of hybrid is:

Cost of hybrid = Cost of gasoline / Estimated mpg of hybrid

= $3.70 / 30

= $0.1233

Hence, the cost of hybrid is $0.1233

3.

Computation of cost savings for hybrid is:

Cost savings for hybrid = Cost of traditional sedan - Cost of hybrid

= $0.1682 - $0.1233

= $0.0449

Hence, the cost savings for hybrid is $0.0449

Part - d:

Computation the price of per gallon is:

Cost of savings = (Price of per gallon / Estimated mpg of traditional sedan) - (Price of per gallon / Estimated mpg of hybrid)

$0.1010 = (Price of per gallon / 22) - (Price of per gallon / 30)

$0.1010 * 30 * 22 = 30 Price of per gallon - 22 Price of per gallon

8 Price of per gallon = $66.66

Price of per gallon = $8.33

Hence, the price of per gallon is $8.33

Working notes:

1.

Computation the cost of savings is:

List price of hybrid + (Expected cost * PVIFA(10%, 6years) - (Cost of savings * No. of Miles per year * PVIFA(10%, 6years) = 0

$5,300 + ($450 * 4.3553) - (Cost of savings * 16,500 * 4.3553) = 0

$5,300 + $1,959.885 - (Cost of savings * 71,862.45) = 0

Cost of savings = $7,259.885 / 71,862.45

Cost of savings = $0.1010

Hence, the cost of savings is $0.1010