Payback Period and NPV of Alternative Automobile Purchase Wendy Li decided to purchase a new Honda...

Payback Period and NPV of Alternative Automobile Purchase Wendy Li decided to purchase a new Honda Civic. Being concerned about environmental issues she is leaning toward a Honda Civic Hybrid rather than the completely gasoline-powered LX model. Nevertheless, she wants to determine if there is an economic justification for purchasing the Hybrid, which costs $3,700 more than the LX. Based on a mix of city and highway driving she predicts that the average gas mileage of each car is 40 MPG for the Hybrid and 30 MPG for the LX. Wendy also anticipates she will drive an average of 12,000 miles per year and that gasoline will cost an average of $3.10 per gallon over the next four years. She also plans to replace whichever car she purchases at the end of four years when the resale values of the Hybrid and the LX are predicted to be $12,000 and $8,500 respectively.

Required

a. Determine the payback period of the incremental investment associated with purchasing the Hybrid.

b. Determine the net present value of the incremental investment associated with purchasing the Hybrid at a ten percent time value of money. Use a negative sign with your answer, if appropriate. Round answer to the nearest whole number.

c. Determine the cost of gasoline required for a payback period of three years on the incremental investment. Round answer to two decimal places

Solutions

Expert Solution

Ans:

Incremental Cost of Hybrid	$ 3,700

Average Miles per Year	12,000



	LX Model	Hybrid Model
Average miles per Years	12,000	12,000
Mileage	30	40
Gasoline Required	400	300
Price of Gasoline	3.1	3.1
Gasoline Expenses in a Years	1240	930

Savings in Gasoline		310.00



a)Payback Period=Initial Investment/Saving In Expenses
	3700.00	÷	-310.00
	-11.94	Years


b) Net Present Value

Incremental Salvage value=12000-8500	=	3500

Years	Cash Flow	Cumulative	DF@10%	CF*DF
	-3700	-3700	1	-3700
1	310	-3390	0.91	282.1
2	310	-3080	0.83	257.3
3	310	-2770	0.75	232.5
4	3810	1040	0.68	2590.8
			NPV	-337.3


c) Gasoline Price for 3 Years payback period

Payback period=Initial Investment /Saving in Expenses


Saving in Expenses=initial Investment /Payback period
	3700	÷	3
	1233.33
Price of Gasoline=Saving in Expenses/Saving in Gasoline in Gallon

	=	1233.333333	÷	(400-300)
	=	1233.333333	÷	100
	=	12.33

ekkarill92 answered 1 year ago

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