Reference no: EM132528074

Payback Period and NPV of Alternative Automobile Purchase

Wendy Li decided to purchase a new Honda Civic. Being concerned about environmental issues she is leaning toward a Honda Civic Hybrid rather than the completely gasoline-powered LX model. Nevertheless, she wants to determine if there is an economic justification for purchasing the Hybrid, which costs $4,950 more than the LX. Based on a mix of city and highway driving she predicts that the average gas mileage of each car is 40 MPG for the Hybrid and 30 MPG for the LX. Wendy also anticipates she will drive an average of 12,000 miles per year and that gasoline will cost an average of $2.75 per gallon over the next four years. She also plans to replace whichever car she purchases at the end of four years when the resale values of the Hybrid and the LX are predicted to be $12,000 and $8,500 respectively.

Required

Question 1: Determine the payback period of the incremental investment associated with purchasing the Hybrid.

Question 2: Determine the net present value of the incremental investment associated with purchasing the Hybrid at a ten percent time value of money.