Consider the choice of buying one of two cars: an electric vehicle (EV), which costs $50,000, and a plug-in hybrid electric vehicle (PHEV), which costs $40,000. Suppose you expect to own the vehicle for 5 years and that you will save $600 per year in gasoline expenditures if you buy the EV. Further suppose that the annual real interest rate for a savings account is r = 3%. Ignore any depreciation of the vehicles for the entirety of this question.

A. Which vehicle provides a better return on investment? By how much?

B. How many years will it take for the two investments to be equal? Hint: use the formula for

a geometric series: = ab(1 bT )/(1 b).

C. Now suppose that you expect gasoline savings to increase at an annual rate of x = 50%. Would this rate justify buying an EV?