Question

Are you thinking of bypassing a gasoline-fueled car in favor of a hybrid (gasoline and electric) automobile? Let's take a look at the relative economics of your possible choice. Let's say the gasoline-fueled car sells for $21,000 and gets 2525 miles per gallon (mpg) of fuel, while the competing hybrid car sells for 24,000 and averages 31.931.9mpg. The expected resale value of the hybrid car is $8,400 and that of the gasoline-only car is $6,900after five years of anticipated ownership. If you drive 14,000 miles per year and gasoline cost will average $3.503.50per gallon, what is the internal rate of return (IRR) on the incremental investment in the hybrid automobile relative to the gasoline-only car? Assume that all other maintenance and operating costs are the same for the two vehicles.

Answer #1

Ans:-

Annual fuel cost of gasoline car = (14000/25)*3.5 = $1960

Annual fuel cost of hybrid car = (14000/32.5)*3.5 = $1507.69

Time = 5 years

Incremental investment of hybrid over gasoline care = 24000-21000 = $3000

Time = 5 years

Incremental annual savings in fuel cost = 1960-1507.69 = $452.31

Incremental resale value = $2500

Let,

IRR = R

Then,

3000 = present value of the annual fuel cost savings + present value of the incremental resale value

3000 = 452.31*(1-1/(1+R)^5)/R + 2500/(1+R)^5

At R = 12%

Present value cash inflows = 3049.04

At R = 13%

Present value cash inflows = $2947.78

As per the method of interpolation,

R = 12% + ((3049.04-3000)/( 3049.04-2947.78))*(13%-12%)

R = 12.48% or 12.5%

So,

Incremental rate of return = 12.5%

Hybrid cars are touted as a "green" alternative; however, the
financial aspects of hybrid ownership are not as clear. Consider
the 2014 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 $390 more than the traditional sedan. The EPA
mileage estimate was 24 mpg for the hybrid and 16 mpg for the
traditional sedan.
a....

Provide your responses to each discussion: (Responses
were analytical and demonstrated original thought.)
Discussion:1
Better fuel economy is the primary motive behind hybridization.
The electric cars rely on electricity, then less gasoline or
diesel. When the first hybrid cars like Toyota Prius and Honda
Insight went on sale in Japan, most automakers felt electric cars
couldn’t travel very far on a full charge. In the recent years,
electric cars have improved significantly and the sales have been
increased too.
From...

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