Payback Period and NPV of a Cost Reduction Proposal-Differential Analysis
Mary Zimmerman decided to purchase a new automobile. Being concerned about environmental issues, she is leaning toward
the hybrid rather than the completely gasoline four-cylinder model. Nevertheless, as a new business school graduate, she wants
to determine if there is an economic justification for purchasing the hybrid, which costs $1,600 more than the regular VUE. She
has determined that city/highway combined gas mileage of the Green VUE and regular VUE models are 27 and 23 miles per
gallon respectively. Mary anticipates she will travel an average of 12,000 miles per year for the next several years.
(Round all of your answers to two decimal places. For example, enter 8.84 for 8.844 and 8.85 for 8.845.)
(a) Determine the payback period of the incremental investment if gasoline costs $3.50 per gallon.
years
5.9
۵
(b) Assuming that Mary plans to keep the car five years and does not believe there will be a trade-in premium associated withthe
hybrid model, determine the net present value of the incremental investment at an eight percent time value of money. (Use a
negative sign with your answer.)
$ 0
(c) Determine the cost of gasoline required for a payback period of three years.
$ 6.9
per gallon
(d) At $3.50 per gallon, determine the VUE Green combined gas mileage required for a payback period of three years.
28.78
Check
xmiles per gallon