You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per year, and will keep the auto for 10 years, at which time the car will have zero trade-in value. Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the "hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model costs $18,260. All other operating costs are the same. You can invest your money at a 6% interest rate (i. e. use a 6% discount rate).

Given these assumptions, is it a good economic decision to purchase the hybrid?

Question

Business

Titus Douglas

2 June, 21:37

You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per year, and will keep the auto for 10 years, at which time the car will have zero trade-in value. Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the "hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model costs $18,260. All other operating costs are the same. You can invest your money at a 6% interest rate (i. e. use a 6% discount rate).

Given these assumptions, is it a good economic decision to purchase the hybrid?

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Answers (1)

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Alexander Krueger · Answer 1

Given these assumptions, you should not buy this hybrid.

Explanation:

The idea of the present value factor depends on the time estimation of cash - that is, cash gotten now is worth more than cash got later on, since cash got now can be reinvested in an elective speculation to procure extra money.

The PV of the savings funds is $2,070 which is not exactly the cost of difference. You need a more noteworthy reserve funds to financially legitimize the acquisition of this hybrid car (for example the NPV is negative).