Paper Details

You are currently driving a gas-guzzling Oldsmobuick that you expect to be able to drive for the next five years. A recent spike in gas prices to $5 per gallon has you considering a trade to a fuel-efficient hybrid Prius. Your Oldsmobuick has no resale value, and gets 15 miles per gallon. A new Prius costs $25,000, and gets 45 miles per gallon. You drive 10,000 miles each year.

a. Calculate your annual fuel expenditures for the Prius and the Oldsmobuick.

b. Calculate the present value of your costs if you continue to drive the Oldsmobuick for another five years. Assume that you purchase a new Prius at the end of the fifth year, and that a Prius still costs $25,000. Also assume that fuel is paid for at the end of each year. (Carry out your cost calculations for only five years.)

c. Calculate the present value of your costs if you purchase a new Prius today. Again, carry out your cost calculations for only five years.

d. Based on your answers to (b) and (c), should you buy a Prius now, or should you wait for five years?

e. Would your answer change if your Oldsmobuick got 30 miles per gallon instead of 15?