Question

7. You are considering a good-looking Toyota hybrid car priced at $28,000 or an elegant GM luxury car at $24,000. The fuel efficiency is rated at 50 miles per gallon for the Toyota and 25 miles per gallon for the GM. The annual maintenance cost for both cars is about 0.5% of the car price. The gasoline in the local market is selling at $2.00 per gallon. The cars are to be driven about 10,000 miles per year. You plan to keep your car for five years only. At the end of the fifth year, the resale values of the Toyota and the GM are about 40% and 30%, respectively, of their original prices. The interest rate is 6%. Which car is better choice form the standpoint of costs?

Answer 1

Statement showing PVCO
	Hybrid Car	GM Luxury Car	Incremental Cot
Cost of Purchase (1)	$28,000.00	$24,000.00
Resale value at the end of 5th Year	$11,200.00	$7,200.00
Pvf @ 6% on 5th Year	0.747	0.747
Pv of Resale Value (2)	$8,366.40	$5,378.40
Net Cash Outflow (1-2)	$19,633.60	$18,621.60	$1,012.00
Statement showing PVCI
	Hybrid Car	GM Luxury Car	Incremental saving
Car driven per year	10000 miles	10000 miles
Fuel efficiency	50miles/gallon	25miles/gallon
Fuel require	200 gallon	400 Gallon
Fuel cost @ $2/Gallon (3)	$400.00	$800.00
Maintainace cost ( 0.5% * car Price) (4)	$140.00	$120.00
Total Cost5= (3+4)	$540.00	$920.00
Cumm Equivalent PF for 5 year $6% (6)	4.21	4.21
PV of Cash inflow in 5 year (5*6)	$2,273.40	$3,873.20	$1,599.80
It's beneficial to purchase Hybrid car because by paying extra amount of $ 1012 , Incremental savin will be $1599.80