Answer to Question #37065 in Management for cece

Question

Current MSRP of Toyota Prius is $24,200 and the MSRP for Corolla is $16,800. Both cars share the same size and features, and the only difference is fuel economy. If you are planning on purchasing one of the two cars and keeping it for 6 years, what is the minimum gas price that justifies the premium paid for the Prius?
The estimated mpg for Prius is 51/48 and Corolla is 29/37. The gas price currently is $3/gallon and you anticipate that it will go up in the future simultaneously with the inflation rate of 2.5% annually. Your opportunity cost is 7.5% and you will pay for either one of the two cars in cash.
Note: I need two answers, one if you drive your car mainly on Highways and the other if you drive mainly in town. You will not bear any maintenance cost for either one of the two cars over the 6-year period.
a. Calculate the minimum gas price that justifies the premium paid for the Prius assuming that you will drive your car in town.
b. Calculate the minimum gas price that justifies the premium paid for the Prius assuming that you will drive your car on highways.
c. Now, we need to know how much you will be saving on your income taxes. The IRS offers a tax credit of $2,200 for qualified hybrid vehicles; the Prius is one of them. Calculate the tax-saving from purchasing the Prius if you income is $45,000 and you are single. Does the tax-saving justify the premium? Combined with you tax savings, what is the minimum gas price that justifies the premium paid for the Prius if used in town or on Highways?

Answer 1

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