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You are evaluating whether you should purchase a hybrid car, or its gasoline-engine counterpart. Select two car models that are similar, with one being a hybrid and one being a non-hybrid model. Assume that you plan to keep the car for ten years and that at the end of ten years, the resale value of both models will be 10% of the original cost of the respective car.

Basic Questions

1. Research the cost of each model (including taxes and title costs). Also obtain an estimate of miles per gallon of fuel efficiency for each model.
2. Estimate the number of miles you drive each year. Also estimate the cost of a gallon of fuel.
3. Given your previous estimate from 1 and 2, estimate the fuel cost of driving the hybrid model for one year. Also, estimate the cost of driving the non-hybrid model for one year. Calculate the fuel cost savings offered by the hybrid model over the non-hybrid model.
4. Calculate the Net Present Value (NPV) of the hybrid model using the annual fuel savings as the annual cash inflow for the ten years you would own the car. Assume a required rate of return of 10%.
5. Compare the NPV of the hybrid model with the cost of the gasoline-engine model. Which model has the lowest cost (the lowest NPV)? From a purely financial standpoint, does the hybrid model make sense?
6. Now look at the payback period of the hybrid model. Use the difference between the cost of the hybrid model and the gasoline-engine model as the investment. Use the annual fuel savings as the expected annual net cash inflow. Ignore the time value of money, how long does it take for the additional cost of the hybrid model to pay for itself through fuel savings?
7. What qualitative and environmental sustainability factors might affect your decision about which model to purchase?

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