Managerial Accounting

Payback period and NPV of Alternative Automobile Purchase

Wendy Li decided to purchase a new Honda Accord. Being concerned about environmental issues, she is leaning toward a Honda Accord Hybrid rather than the completely gasoline-powered LX model. Nonetheless. she wants to determine if there is an economic justification for purchasing the Hybrid, which cost $2,000 more than the LX. Based on a mix of city and highway driving, she predicts that the average gas mileage of each car is 48MPG for the Hybrid and 30MPG for the LX. Wendy also anticipates she will drive an average of 15,000 miles per year and that gasoline will cost an average of $2.50 per gallon over the next four years. She also plans to replace whichever car she purchases at the end of four years when the resale values of the Hybrid and the LX are predicted to be $12,500 and $9,000 respectively.

Required:

a) Determine the payback period of the incremental investment associated with the purchasing the Hybrid.

b) Determine the net present value of the incremental investment associated with purchasing the Hybrid at a 8% time value of money. ( Use a negative sign with your answer, if appropriate. Round answer to the nearest whole number).

c) Determine the cost of gasoline required for a payback period of two and a half years on the incremental investment.

Round answer to two decimal places.