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 $5,800 (including tax consequences) more than the comparable Edsel 550. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $500 more than the traditional sedan. The EPA mileage estimate was 29 mpg for the hybrid and 21 mpg for the traditional sedan. 20 points a. Assume that gasoline costs $3.95 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 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.) c. Gasoline costs $3.95 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 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.) Answer is not complete. 28,266 Miles per year Price per gallon Miles per year Price per gallon

Answer 1

a.We need to equating the total gasoline costs for the total of 6 yrs.

Total costs by which the hybrid is higher for the total of 6 years(than the traditional sedan)=

5800+(6*500)=

8800

So, if the total miles driven for all the 6 years be x, then,

(x/29*3.95)+8800=(x/21*3.95)

Solving for x, we get the total miles for 6 yrs. should be

169595

So, no.of miles to be driven per year to make the decision to buy the hybrid , worthwhile =

169595/6=

28265.83

ie.

28266

miles

b.Putting values in the same (above) equation,

& supposing the same price/gallon to be x,

(16500*6)/29*x)+8800=((16500*6)/21*x)=

Solving for x, we get the price /gallon to be

6.77

c..Now,in equation as per a. above, we need to mutiply the recurring annual costs alone by the annuity factor

to compare in Present value terms.

Annuity factor at i=10%, & n=6 yrs. =4.35526

& the additional annual ownership costs are taken out of that equation.

we have,

(x/29*3.95*4.35526)+5800+(500*4.35526)=(x/21*3.95*4.35526)

Solving for x, we get the total miles per year as (here x represents per yr mileage)

35301.2

So, no.of miles to be driven per year to make the decision to buy the hybrid , worthwhile =

35301

miles

d.Putting 16500 for miles /year as in b. in the equation as per c. above,

& supposing the same price/gallon to be x,

(16500/29*x*4.35526)+5800+(500*4.35526)=(16500/21*x*4.35526)=

8.45

ANSWERS:
a.	Miles/yr.	28266
b.	Price/gallon	6.77
c.	Miles/yr.	35301
d.	Price/gallon	8.45