Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900 (including tax consequences) more than the comparable gasoline-only SUV. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $250 more than the gasoline- only model. The EPA mileage estimate was 39 mpg for the hybrid and 30 mpg for the gasoline-only SUV.

a. Assume that gasoline costs $2.85 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?