Find which vehicle is economically preferred

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Reference no: EM13189688

You are considering the cash purchase of either a Lexus RX450h AWD Hybrid or a comparably equipped Lexus RX350 AWD. The RX450h has a manufactures suggested retail price (MSRP) of $44,825 while the conventional Lexus RX350 MSRP is $39,375. For simplicity, assume MSRP is the cash purchase price. The vehicle will be driven 1,000 miles per month and you hope to can sell either vehicle after 36 months for 70% of the purchase price (use the MSRP). Sales tax of 8.4% is paid at time zero and is based on the MSRP amount only. Beyond sales tax, you
will also have to pay a $1,200 dealer prep fee for either vehicle, and vehicle license and registration fees at the county will total $1,000 for the RX450h and $900 for the RX350 (the registration fee is paid separately but part of the overall time zero cost). Assume the price of gas is $3.00 per gallon and this will remain uniform over the next 36 months. Treat the miles, price per gallon and all other parameters as end of period values. The RX450h is expected to get an average 29 miles per gallon while the conventional RX350 is expected to get 20 miles per gallon. A simple average for mileage was considered assuming equivalent combined city and highway use and rounded up for further convenience. Maintenance and insurance will be about the same for the two vehicles since they are both under warranty over the required service period, so neglect these expenses. Your minimum rate of return is a nominal 12% compounded monthly. Assume that currently there are no tax credits available for the Lexus RX450h, please consider the following:
A) Lay out time diagrams reflecting the before-tax cash flows for the 36-month service life for each vehicle.
B) Determine which vehicle is economically preferred using a present worth cost analysis.
C) Calculate the price per gallon that would cause you to be economically indifferent between the two vehicles assuming other opportunities exist at 12% per year, compounded monthly.
D) Make a valid incremental NPV analysis of the proposed savings associated with the Hybrid.

Reference no: EM13189688

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