Question

With gasoline prices at $3.00 per gallon, consumers are flocking to purchase hybrid vehicles (combination of gasoline and electric motors) that get 50 miles per gallon of gasoline. The monthly payment on a three-year lease of a hybrid is $499 compared to $399 per month on a conventional, equivalent traditional gasoline car that gets 25 miles per gallon. Both vehicles require a one-time $1,500 payment for taxes, license, and dealer charges. Both vehicles have identical lease terms for the residual value, maximum number of miles allowed without penalty, and so forth.

Required:
a. Calculate how many miles the consumer must drive per year to make the hybrid the economical choice over the conventional gasoline-only vehicle.
b. How does your answer to part (a) change if the price of gasoline is $4.00per gallon?

Answer 1

Answer and Explanation:

The computation is shown below:

a. The number of miles driven per year is

Let us assume the mileage be M

Now

$499 + M ($3 ÷ 50) = $399 + M ($3 ÷ 25)

$100 = M(0.12 - 0.06)

M = $100 ÷ 0.06

= 1,666.66 miles per month

For year, it is

= 1,666.66 × 12

= 20,000 miles per year

c. Now in the case when the gasoline price is $4 per gallon

$499 + M ($4 ÷ 50) = $399 + M ($4 ÷ 25)

$100 = M(0.16 - 0.08)

M = $100 ÷ 0.08

= 1,250 miles per month

For year, it is

= 1,250 × 12

= 15,000 miles per year