A12-65Evaluating the Purchase of an Asset with Various Capital Budgeting Methods
In this activity, you will be 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 model and one being the nonhybrid model. (For example, the Honda Civic is available as a hybrid or a gasoline-engine model.) Assume that you plan to keep your car for ten years and that at the end of the ten years, the resale value of both models will be negligible.
Basic Discussion Questions
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 you drive each year. Also estimate the cost of a gallon of fuel.
Given your previous estimates from 1 and 2, estimate the total fuel cost of driving the hybrid model for one year. Also estimate the total fuel cost of driving the nonhybrid model for one year. Calculate the fuel cost savings offered by the hybrid model over the nonhybrid model.
Calculate the NPV of the hybrid model, using the annual fuel savings as the annual cash inflow for the 10 years you would own the car. Assume a required rate of return of 10%.
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?
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 your decision about which model to purchase?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more