Hybrid Car Payoff

 

You have been hired as a consultant to determine how cost effective hybrid cars are in the light of increasing gas prices.

Part 1

Build a mathematical formula showing the number of years it will take (PAYBACK) for the extra cost of the hybrid car to pay for itself (given its higher fuel efficiency) as a function of the following variables: The price of the hybrid car (PRICE-H), the MPG of the hybrid car (MPG-H), the price of its regular (non-hybrid) counterpart (PRICE-R), the MPG of its regular counterpart (MPG-R), the average distance driven per year (DIST), and the price of gas (GAS). Use the exact names of the variables as given. Your formula should show an equal sign, with PAYBACK on the left and the other variables on the right. In addition to showing the formula itself, also show how you derived the formula and where it came from. By what reasoning?

Once you have figured out the formula manually, build it in MS-Word using the Equation capability under "Insert".

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Consider the following facts (don't argue with whether they are true or not):

Put this formula, as well as all the facts given above, into an Excel spreadsheet. Use the spreadsheet to answer the following questions.

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Part 2

How long would the hybrid car take to pay for its extra cost (in light of the savings it will generate over time due to its higher fuel efficiency) if the price of gas were $6/gallon? Show all your work utilizing the spreadsheet above.

Part 3

At what current gas price would the hybrid car pay for itself in 3 years?

Part 4

How sensitive is the payback period to the changes in the (average) distance driven per year? Answer this question by changing (increasing and decreasing) the values of DIST to show what relative (percentage-wise) impact those changes have on PAYBACK. 

The document you turn in should show the answers to questions 1/2/3/4 above. Show everything in a single Word document and, as usual, convert the Word document into PDF format before turning it in. Do NOT upload any Excel spreadsheets. 

As a consultant, you need to help your client understand your calculations and conclusions. Explain everything in detail to be convincing. Do not pull rabbits out of a hat! Use LOGIC, not MAGIC!!!

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"You can tell gas prices are going up in California. Prius owners are getting that smug look again!" Jay Leno