The Economics of Buying a More Fuel-Efficient Automobile: An Interactive Analysis

Barke, Robert L.; Clouse, Ronald; Stout, Thomas G.; Stout, Gary R.
June 2009
Journal of Financial Planning;Jun2009, Vol. 22 Issue 6, p62
Academic Journal
•This paper develops a practical method for testing the differential cost of ownership for any two new automobiles, as well as the differential cost of replacing a car for greater fuel efficiency. •In evaluating a new car relative to a fuel-efficient new car purchase, the paper explores: the out the door purchase price; expected tax credit for the fuel-efficient vehicle; expected resale value at the end of five years; estimated annual city and highway miles driven; expected miles per gallon for city and highway miles; amount of down payment, financing period, and rate for the amount financed; expected fuel prices per gallon over a five-year period; and discount rate for determining the present value of costs and savings over the five-year period. In evaluating the replacement of a car with a more fuel-efficient car it also explores: loan balance, monthly payment, and number of remaining payments for the currently owned vehicle; estimated annual repair cost for non-standard maintenance after the existing warranty has expired; and estimated annual insurance cost for each vehicle. The down payment on the new car is assumed to include the net trade-in value of the currently owned automobile. •The authors conclude that, despite high costs for gasoline, in most situations it is difficult to justify the purchase of a hybrid vehicle based solely on the economics of the transaction.


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