Consider the choice of buying one of two cars: an electric vehicle (EV), which costs $60,000, and a plug-in hybrid electric vehicle (PHEV), which costs $50,000. Suppose you expect to own the vehicle until the end of the 9th year and that you will save $1,000 per year in gasoline expenditures if you buy the EV. Further suppose that the annual real interest rate for a savings account is ???? = 2%. For simplicity, assume there is no resale value for either car and that you receive your gasoline savings annually starting immediately (i.e., today).

 

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

 

2. How many years will it take for the two investments to be equal?

 

3. Now suppose that you expect gasoline savings to increase at an annual rate of ???? = 10%. Would this rate justify buying an EV?