In an Excel file evaluate whether your chosen company should invest in a hybrid car or its gasoline-engine counterpart. Select two car models that are similar, with one being a hybrid model and one being the non-hybrid model (for example the Honda Civic is available as a hybrid or a gasoline-engine model). Assume the company is planning on keeping this car for 10 years and at the end of the 10 years, the resale value of both models will be negligible.
Research the cost of each model (include taxes and title costs). Also, obtain an estimate of the miles-per-gallon fuel efficiency of each model.
Estimate the number of miles the car will be driven each year. Also estimate the average cost of a gallon of fuel over this time frame.
Given your previous estimates, estimate the total cost of driving the hybrid model for one year. Also estimate the total cost of driving the non-hybrid model for one year. Calculate the savings offered by the hybrid over the non-hybrid model.
Calculate the NPV (chose a realistic required rate of return) of the hybrid model, using the annual fuel savings as the annual cash inflow for the 10 years the company owns the car.
Compare the NPV of the hybrid model with the cost of the gasoline-engine model. Which model has the lowest costs (the lowest NPV)? From a purely financial standpoint, does the hybrid model make sense?
Using your chosen required rate of return, compute the IRR for each of these investments. Which appears the better choice?
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. Ignoring 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?
What qualitative factors might affect the decision about which model to purchase?