Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2020 Edsel 550h, which had a list price of $5,800 (including tax consequences) more than the comparable gasoline-only 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. 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.)
Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2020 Edsel 550h, which had a list price of $5,800 (including tax consequences) more than the comparable gasoline-only 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. 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Hybrid Cars: Financial Analysis**
Hybrid cars are often promoted as a "green" alternative; however, the financial implications of owning a hybrid vehicle are not always straightforward. Let's consider the example of the 2020 Edsel 550h, which has a list price of $5,800 more than its gasoline-only counterpart, the Edsel 550. In addition to this initial cost, the hybrid's annual ownership expenses (excluding fuel) are estimated to be $500 higher than the traditional sedan. According to the EPA, the hybrid offers a fuel efficiency of 29 mpg, compared to 21 mpg for the conventional model.
### Key Questions
a. **Miles per Year Calculation**: Assuming gasoline costs $3.95 per gallon and a six-year ownership period, how many miles must you drive annually to justify purchasing the hybrid, ignoring the time value of money? Calculate without intermediate rounding and round your answer to the nearest whole number.
b. **Price per Gallon Calculation for Set Mileage**: If you drive 16,500 miles annually for six years, at what price per gallon does purchasing the hybrid become worthwhile, ignoring the time value of money? Round your final answer to two decimal places.
c. **Miles per Year with Interest Consideration**: With gasoline priced at $3.95 per gallon and a six-year ownership plan, how many miles must you drive annually to make the hybrid purchase decision worthwhile, considering a 10 percent interest rate and year-end cash flows? Again, calculate without intermediate rounding and round your final answer to the nearest whole number.
d. **Price per Gallon with Interest Consideration**: Assuming a driving distance of 16,500 miles annually over six years, what gasoline price would necessitate buying the hybrid, considering a 10 percent interest rate and that all cash flows occur at the year's end? Round your final answer to two decimal places.
### Calculated Answers
- a. **Miles per Year**: 21,707
- b. **Price per Gallon**: $3.62
- c. **Miles per Year with Interest**: 27,548
- d. **Price per Gallon with Interest**: $4.59
**Conclusion**: The answers provided address the conditions under which purchasing a hybrid becomes financially sensible. The calculations consider both simple scenarios (a and b) and those factoring in interest (c and d). Note that some answers may be marked as complete but
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