FIN 3601 Corporate Finance Case

You are currently employed at Honeywell as a Financial Analyst and your boss has heard about hybrid automobiles and is curious about whether your company should be purchasing hybrids instead of conventional gas powered vehicles. She wants you to prepare a report detailing the analysis and decision on whether your company should be purchasing hybrids for its fleet. Hybrids (cars that run on gas and electricity) are a popular alternative to conventional or gasoline powered cars. The trade-off of ownership is that they cost more to purchase, but have improved gas mileage over conventional cars thus resulting in annual cost savings. Some assumptions to use in your analysis are: a 21% corporate tax rate, an 8% cost of capital/discount rate, depreciation is an expense (straight-line calculation), and cars are driven an average of 40,000 miles per year and are replaced at the end of four years. Also assume that each car (conventional and hybrid) generates annual revenues of $20,000 (the Lexus LS and LC vehicles being expensive cars generate $40,000 of revenue per year). Annual fixed costs (insurance, maintenance, etc., not including depreciation) are $2,000 per car (conventional or hybrid). This year you are looking to purchase 1,000 cars for the Company fleet. You will need some additional assumptions such as the price per car, gas mileage, price of gasoline, etc.

Your calculations should include annual (net income, operating cash flows, and cash flow from assets) results and apply investment criteria (NPV, payback, discounted payback, IRR, and profitability index) for the purchase of 1,000 conventional vehicles and 1,000 hybrid vehicles.

Also, provide a sensitivity analysis concerning gasoline prices, (i.e. what would be the impact on NPVs of hybrid and conventional cars if gasoline prices increased one dollar per gallon from your base assumption.)

Perform calculations of annual (net income, operating cash flows, and cash flow from assets) and apply the NPV investment criteria (for the sensitivity analysis you do not need to calculate payback, discounted payback, IRR, and profitability index) to both 1,000 conventional vehicles and 1,000 hybrid vehicles.

Below is a list of hybrid vehicles, pick one car (2018 or 2019 model year) and decide whether you would purchase a hybrid version or a non-hybrid version. To be comparable, the hybrid and non-hybrid autos should have generally the same options. You can pick a different hybrid car (2018 or 2019 model year) but do not choose an electric plug in vehicle.

Ford Toyota

Fusion, C - Max Price: $24,120 - $27,275 Camry, Highlander Price: $32,275 - $47,905

Prius Price: $23,475 - $30,565

Avalon Price: $35,500 - $42,200

RAV4 Price: $24,660 - $36,400

Honda Lexus

Insight Price: $23,830 - $28,090 NX Price: $36,385 - $40,025

Accord Price: $23,570 - $35,800 RX Price: $43,470 - $54,085

ES Price: $39,600 - $44,135

LS Price: $75,000 - $84,220

LC Price: $92,000 - $96,510

Chevrolet Kia

Malibu Price: $22,090 - $31,670 Optima Price: $22,900 - $31,900

Lincoln Hyundai

MKZ Price: $35,995 - $46,995 Sonata Price: $23,300 - $31,900

You will be responsible for turning in a short memo (i.e. one page max) detailing your analysis and decision (what and why) on whether your company should be purchasing hybrids for your fleet and does the decision change if gas prices increase by one dollar per gallon. Please attach your calculations, Excel (remember that the NPV function in Excel is not the same as the calculator) can be a very useful tool but you are not required to use it.

Price of Gas sensitivity to $1 change in Gas price

Price of Gas: $2.65