8. 23.

Break-even analysis [LO 11.3] Hybrid cars are touted as a ‘green’

alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2016 Toyota Camry Hybrid LE, which had a list price of $5 500 (including tax consequences) more than the comparable Volkswagen Touareg VR6. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be

$350 more than the traditional sedan. The EPA fuel economy estimate was 6 litres per 100 kilometres for the hybrid and 7.8 litres per 100 kilometres for the traditional sedan.

1. Assume that petrol costs $0.85 per litre and you plan to keep either car for six years. How many kilometres per year would you need to drive to make the decision to buy the hybrid worthwhile, ignoring the time value of money?

2. If you drive 24 000 kilometres per year and keep either car for six years, what price per litre would make the decision to buy the hybrid worthwhile, ignoring the time value of money?

3. Rework parts

(a) and

(b) assuming the appropriate interest rate is 10 per cent and all cash flows occur at the end of the year.

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