Net Present Value of a Hybrid Car

Posted on March 7th, 2012 by
   

This article will aim to convey they cost reduction that should be realized in terms of cost savings that should be factored into the purchase of a hybrid or electric automobile.

To do this I will have to create general round numbers to show the effect, however, if you would like to pursue this analysis as a consumer you can follow the same steps importing the specific numbers your case requires. My case will not delve into intricate arguable nuances such as the value of human taste and opposite sex first impressions, as well as mechanical differences that may result in upkeep monetary differences.

To avoid any influence or bias be aware I am going to create my numbers entirely from my knowledge and do zero market research (aside from use averages accepted by the government).

The hypothetical cars in my example will be a 2013 gas powered vehicle manufactured by Donkey named the HAWW, and a 2013 hybrid vehicle manufactured by Mia-Hayya named the Tremendo. The HAWW retails for $18,000 and uses one gallon of gasoline for every 22 miles traveled. The Tremendo can be purchased for $25,000 and murders one gallon of gasoline for every 38 miles it creates friction with.

The economic world is unchanging for this example with auto loan interest rates at 4%. In addition, average anticipated returns are a fastidious 4% as well. Moving onward for the sake of the example, assume you must buy a car. No, you cannot mooch off your buttery female nor derive your automobile pleasures from the humble Nicaraguan next door. Concurrently, you are limiting purchase option to these two, it will be sufficient enough to show effects, and these effects will only be altered by changes in numbers.

So, we know that you will have an initial outlay of cash or either $18,000 or $25,000. This money will come directly from five year financing, therefore, we will plan for one of the amortization schedules shown below (for simplicity, yearly payments will be due and we will assume purchase occurred on 1/1/2012).

HAWW by Donkey (Beg. Bal. $18,000)

Year Payment Interest Principal Amt. Due
2012 $4.043.29 $720.00 $3,323.29 $14,676.71
2013 $4,043.29 $587.07 $3,456.22 $11,220.49
2014 $4,043.29 $448.82 $3,594.47 $7,626.02
2015 $4,043.29 $305.04 $3,738.25 $3,887.77
2016 $4,043.29 $155.11 $3,887.77 $0.00

 

Tremendo by Mia-Hayya (Beg. Bal. $25,000)

Year Payment Interest Principal Amt. Due
2012 $5,615.67 $1,000.00 $4,615.67 $20,384.33
2013 $5,615.67 $815.37 $4,800.29 $15,584.03
2014 $5,615.67 $623.36 $4,992.31 $10,591.72
2015 $5,615.67 $423.67 $5,192.00 $5,399.72
2016 $5,615.67 $215.99 $5,399.72 $0.00

 

**Now that I have completed those all by hand I would like you to note, they are meaningless to show the gain (if any) from hybrids, This money will all equal the sale price for a net present value this is crucial to understand this value of time.

Now, the numbers we are concerned with are the $7,000 in price difference. In current dollars they are worth $7,000. (However, with the traditional car that $7,000 can earn you the average rate of return, becoming; 7680.00 after year 1, 7987.20 in year 2, 8306.68 in year 3, 8638.95 in 4, and 8984.51 to close the 5 years. Using time value of money to bring these gains to current value you would have $7,000.)

You will also pay the 4% interest on the additional $7,000 financed to purchase the machine. This will follow and amortization schedule like those pictured above, and will result in interest payments of $280.00, $217.10, $154.21, $148.04, and $142.12, totaling $941.47. These must be put in terms of present day value and become; $269.23, $200.72, $137.09, $126.55, and $116.81, totaling $850.40 extra cost in the net present value.

In recap, the HAWW in NPV costs $18,000; the Tremendo in NPV costs $25,850.40.

Now, onto the nuts and bolts of this analysis, let’s assume the HAWW will last 14 years and the Tremendo will last 10. Average miles driven per year will be 15,000, and the average price of gasoline the entire time will be $4.00 per gallon.

Therefore, over 10 years the Tremendo will cover 150,000 miles and spend $15,789.47 on gasoline. The HAWW over 14 years will traverse 210,000 miles and purchase $38,181.81 on gasoline. For the sake of parity we will not factor in miles driven after 10 years for the HAWW nor the outlay required for a replacement Tremendo following year 10.

This creates 150,000 miles for the HAWW and $27,272.72 stuffed into the liquid evaporator modern philosophers refer to as a gas tank.

Charted, factoring in time value of money this is the difference:

Year Miles HAWW $ HAWW PV Trem. $ Trem. PV Diff. PV of Difference
2012 15,000 $2,727.27 $2,727.27 $1,578.95 $1,578.95 $1,148.32 $1,148.32
2013 15,000 $2,727.27 $2,622.38 $1,578.95 $1,518.22 $1,104.16 $1,061.69
2014 15,000 $2,727.27 $2,521.52 $1,578.95 $1,459.83 $1,061.69 $981.59
2015 15,000 $2,727.27 $2,424.53 $1,578.95 $1,403.68 $1,020.85 $907.53
2016 15,000 $2,727.27 $2,331.28 $1,578.95 $1,349.69 $981.59 $839.07
2017 15,000 $2,727.27 $2,241.62 $1,578.95 $1,297.78 $943.84 $775.77
2018 15,000 $2,727.27 $2,155.40 $1,578.95 $1,247.87 $907.53 $717.23
2019 15,000 $2,727.27 $2,072.50 $1,578.95 $1,199.87 $872.63 $663.13
2020 15,000 $2,727.27 $1,992.79 $1,578.95 $1,153.72 $839.07 $613.10
2021 15,000 $2,727.27 $1,916.15 $1,578.95 $1,109.35 $806.80 $566.85

 

This present value difference in money spent on gasoline totals a $8,274.28 savings.

This lowers the NPV of the Tremendo to $17,576.12.

The HAWW would relatively have an $18,000 NPV since it incurred zero gasoline savings.

Hence, at the nadir Tremendo is effectively $423.80 less expensive in net present value.

Therefore, the more eco-friendly car even with a $7,000 higher sticker price is a more financially sound purchase. The reason someone should not choose this car, ceteris paribus, is a shortage in available funds since payments will be higher.

 

Written by: Benjamin H. Childers

Special Thanks to Spark Tabor, Vicente F. Mira, and Scott Martin

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5 People have left comments on this post



» Ken Adams said: { Mar 7, 2012 - 04:03:49 }

This is a fabulous approach and example. I must admit through the entire first half I was convinced the lower cost old school car made more financial sense. Really makes me question how “cheap” hybrid and electric cars can be.

» Ken Adams said: { Mar 7, 2012 - 04:03:58 }

I understand how this can save me money, can it make me money? Green car investments, opportunities, etc??

» Adam Jones said: { Mar 7, 2012 - 08:03:27 }

Very funny but very insight article

» Seven Eleven said: { Mar 7, 2012 - 09:03:10 }

Superb. Superb. Superb.

» Mike Nemeth said: { Mar 12, 2012 - 02:03:07 }

Excellent approach.



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