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.

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 1

c]

To make the decision to buy the hybrid worthwhile, the NPV should be positive.

NPV = present value of incremental cash flows - initial investment.

Incremental cash flows each year = reduced gas expenses - increased ownership cost.

Reduced gas expenses each year = [(miles per year / sedan mileage) - (miles per year / hybrid mileage)] * cost per gallon.

Reduced gas expenses each year = [(miles per year / 21) - (miles per year / 29)] * $3.95.

Initial investment = $5,800.

NPV is calculated using NPV function in Excel.

We calculate the number of miles per year to make NPV zero by using GoalSeek in Excel.

fx =NPV(10%,E6:E11)+E5 D B C E12 A Miles per 1 year 2. 30000 3 4 Year Reduced Increased Initial gas ownership Incremental investment expenses cost cash flow (5,800) (5,800) 1,557 500 1,057 1,557 1,057 1,557 1,057 1,557 500 1,557 1,057 1,557 1,057 NPV (1,198) 500 BE60 No 1,057 500 500

B E 1 Miles per year 30000 2 3 4 Year 5 0 6 1 =B5 72 83 Initial investment Reduced gas expenses Increased ownership cost Incremental cash flow -5800 =(($B$1/21)-($B$1/29))*3.95 500 =C6-D6 =f($B$1/21)-($B$1/29))*3.95 500 =C7-D7 = {($B$1/21)-($B$1/29))*3.95 500 =C8-D8 =(($B$1/21)-($B$1/29))*3.95 500 =C9-D9 =(($B$1/21)-($B$1/29)) *3.95 500 =C10-D10 =f($B$1/21)-($B$1/29)) *3.95 500 =C11-D11 NPV =NPV(10%, E6:E11)+E5

- E12 A Miles per 1 year fx=NPV(10%, E6E11) +E5 D E B C F G H I ? Goal Seek x 30000 Set cell: $E$12 To value: 0 By changing cell: $B$11 OK 4 Year Cancel 500 Reduced Increased Initial gas ownership Incremental investment expenses cost cash flow (5,800) (5,800) 1,557 1,057 1,557 1,057 1,557 1,057 1,557 500 1,057 1,557 500 1,057 1,557 1,057 NPV (1,198)| 11 500 12 12

The number of miles per year at which NPV is zero is 35,301 miles.

B1 fc 35301.2401556017 D А в C E Miles per 35,301 Increased ownership cost 4 Year Initial Reduced gas investment expenses (5,800) 1,832 1,832 1,832 1,832 1,832 1,832 500 500 500 500 500 500 Incremental cash flow (5,800) 1,332 1,332 1,332 1,332 1,332 1,332 NPV

d]

The price per gallon at which NPV is zero is calculated using GoalSeek in Excel as below :

fe =(($B$1/21)-($B$1/29)) *$B$2 D E B C 16,500 A Miles 1 per Price per 2 Gallon $3.95 4 Year Increased Initial Reduced gas ownership investment expenses cost (5,800) 856 500 Incremental cash flow (5,800) 356 356 356 856 500 auwN 856 856 856 356 500 500 500 500 856 356 356 (4,249) NPV

F G H I 16,500 Α Miles i per Price per 2 Gallon 3 $3.95 Goal Seek SE$12 Increased ownership cost Set cell: To value: By changing cell: 4 Year 0 1 Initial Reduced gas investment expenses (5,800) 856 856 856 OK Cancel 2 500 500 500 500 500 500 Incremental cash flow (5,800) 356 356 356 356 356 356 (4,249) 856 5 856 856 6 11 12 13 NPV

C6 - f = ($B$1/21)-($B$1/29)) *$B$2 A B C D E Miles 1 per 16,500 Price per 2 Gallon $8.45 3 Increased Initial Reduced gas ownership Incremental 4 Year investment expenses cost cash flow 0 (5,800) (5,800) 1 1,832 500 1,332 1,832 500 1,332 500 1,332 1,832 500 1,332 500 1,332 500 1,332 NPV 1,832 au wn

The price per gallon at which NPV is zero is $8.45.