Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2010 Lexus RX 450h, which had a list price of $5,565 (including tax consequences) more than the comparable Lexus RX 350. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $300 more than the traditional sedan. The EPA mileage estimate was 29 mpg for the hybrid and 21 mpg for the traditional sedan.

a. Assume that gasoline costs $3.25 per gallon and you plan to keep either car for six years. How many miles per year would you need to drive to make the decision to buy the hybrid worthwhile, ignoring the time value of money?

b. If you drive 15,000 miles per year and keep either car for six years, what price per gallon would make the decision to buy the hybrid worthwhile, ignoring the time value of money?

c. Rework parts (a) and (b) assuming the appropriate interest rate is 10 percent and all cash flows occur at the end of the year.

d. What assumption did the analysis in the previous parts make about the resale value of each car?