Question

Determine how much a car owner would be willing to invest to achieve the energy efficiency of 50 mpg. Assume that gasoline sells for $4.00/gallon and the owner expects to receive a 5% return on their investment. The owner drives 15,000 miles per year and the life of the car is 15 years. Assume the current fuel efficiency is 20 mpg. IN of variables in video"

Answer 1

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In order to calculate the investable amount we need to calculate the value of savings in Expense due to investment in Increasing Energy Efficiency. For this amount to be invested is less or equal to the future savings in costs. Future Savings in costs are bought to the present value for Decision Making. Calculation of Cost savings Present Annual Fuel Consumption = 15000 miles/20mpg =750 gallons Annual Fuel Consumption after investment = 15000 miles/50mpg =300 gallons Savings in Fuel consumption on investment in increased efficiency =750-300 Gallons =450 gallons Value of Saving in fuel consumption = 450 x 4 $ $ 1800 Present Value Calculation of Present Value of Savings i.e Decrease in Cash outflows. Savings in Year Discount Factor Expense 1 0.952380952 $1,800 2 0.907029478 $1,800 3 0.863837599 $1,800 4 0.822702475 $1,800 5 0.783526166 $1,800 6 0.746215397 $1,800 7 0.71068133 $1,800 8 0.676839362 $1,800 9 0.644608916 $1,800 10 0.613913254 $1,800 11 0.584679289 $1,800 12 0.556837418 $1,800 13 0.530321351 $1,800 14 0.505067953 $1,800 15 0.481017098 $1,800 $1,714 $1,633 $1,555 $1,481 $1,410 $1,343 $1,279 $1,218 $1,160 $1,105 $1,052 $1,002 $955 $909 $866 $18,683 Present Value of Future savings in cost due to increased efficiency = $ 18683 Car owner can invest upto a amount of $ 18,683 for Increasing Energy Efficiency of car.