Breakeven: Purchase of a hybrid vehicle
Is you or someone you know looking to purchase a lunchbox … I mean, hybrid vehicle? The main benefit of owning a hybrid vehicle is reduced fuel cost as a result of higher gas mileage. We’re going to examine whether or not this improved gas mileage will offset the higher price of a hybrid vehicle.
Here are just a few factors to consider when doing your breakeven calculation. As usual, there are many other criteria to consider, but we’ll focus on the main points for this example.
>> What is the price of the hybrid vehicle?
>> What is the average gas mileage performance?
>> Is a tax credit offered for the purchase of a hybrid vehicle?
>> How much does a similarly equipped gasoline vehicle cost?
>> What is the average gas mileage performance of the gasoline vehicle?
>> What is your estimated interest rate? This may take into consideration things such as market rates, inflation, etc.
>> How many miles do you typically drive your vehicle every year?
>> How many years do you plan to use the vehicle? (Make sure that both time periods are the same for the purpose of these calculations.)
Here is a relatively simple (and hypothetical) example to consider …
Hybrid:
– Price: $22,000
– Average gas mileage: 40 miles per gallon (mpg)
– Tax credit: $2,000 (This will reduce the quoted price to $20,000.)
Similarly equipped gas vehicle:
– Price: $18,000
– Average gas mileage: 25 miles per gallon (mpg)
Assume that your rate of interest per year is 4%. You plan to drive the vehicle 20,000 miles each year over a period of five (5) years.
Ok, now we’re going to determine the breakeven point in terms of gasoline costs.
First, we’ll find the equivalent uniform annual cost for each vehicle.
Hybrid: ($22,000 – $2,000)*(A/P, 4%, 5) + ($C/gal)*[(20,000 miles per year)/(40 mpg)]
Similarly equipped gas vehicle: $18,000*(A/P, 4%, 5) + ($C/gal)*[(20,000 miles per year)/(25 mpg)]
Note that A/P means to find the annual worth given a present worth. Since the car prices are given in terms of present worth, we need to convert it to annual worth to find the equivalent uniform annual cost.
Notice that C, the cost per gallon of gasoline, is the unknown variable. Simply set the expressions for the hybrid and gas vehicles equal to each other, and solve for C.
$20,000(0.2246) + 500C = $18,000(0.2246) + 800C
300C = 2000(0.2246) => C = 2000*0.2246/300 = $1.50 per gallon
For this example, solving for C yields a breakeven cost of approximately $1.50 per gallon.
In this example, if the average cost of gasoline over the next five years is less than $1.50 per gallon, then it’s more economical to purchase a similarly equipped gasoline vehicle. On the other hand, if the projected estimate of gasoline costs over the next five years is more than $1.50 per gallon, then it’s more economical to purchase the hybrid vehicle.
As mentioned before, this is a relatively simple example. There may be many other factors to consider in real life, such as maintenance, parts, etc. Nevertheless, this is a good model to play around with. Feel free to experiment with the different factors and variables in this example.
