You are planning the purchase of a new car upon graduation and are considering either a hybrid or gasoline powered version. You have a large graduation present and can pay cash for either car. The hybrid is rated at 45 mpg and the gas version is 30 mpg. You anticipate driving 15,000 miles per year for 5 years.
The hybrid costs $3,300.00 more than the gas version but will have a trade-in value $1500.00 higher.
The hybrid is more complex so to compensate for the difference, you apply a “hurdle”rate of 6.0% to the net present value calculations for the cars. You figure that the maintenance costs will be the same for each vehicle.
If you do not buy the hybrid, you will invest the $3,300.00 in a savings account that pays 3%.
Currently gasoline is selling for $2.40 per gallon and you estimate that will increase 5.0% per year starting at the beginning of year 2. What is the NPV difference for the hybrid version and which one should you buy.