Case Study - Evaluating the Purchase of an Asset with Various Capital

- Evaluating the Purchase of an Asset with Various Capital Budgeting Methods - Case Study Example nd 50 miles per gallon respectively, whereas, the cost and miles per gallon of non-hybrid Toyota Yaris 5-Door LE 2014 is $ 17,644 and 32 respectively (U.S. Department of Energy). The total cost of driving the hybrid model for one year = annual gallons of fuel*cost per gallon. Gallons used per year = (12,000/50) = 240 gallons. Therefore, total cost = (240*2.071) = $ 497.04 per year. On the other hand, the total cost of driving the non-hybrid model for one year = annual gallons used*cost per gallon. Gallons used per year = (12,000/32) = 375 gallons. Therefore, the total cost = (375*2.071) = $ 776.625 per year. Consequently, the savings offered by the hybrid model over the non-hybrid model = (776.625 – 497.04) = $ 279.585 per year (Fuel cost calculator). The NPV of the hybrid model. The annual cash inflow = $ 279.585. The rate of return = 10%. The initial investment = $ 19,905. The NPV = $ -18,187. See appendix 1 (Götze, Northcott, and Schuster 68-76). Comparatively, the NPV of the hybrid model (-18,187) is lower than the cost of the gasoline engine model (17,644). However, from a pure financial standpoint, the hybrid model makes sense since it saves up to $ 279.585 on fuel consumption as compared to non-hybrid model (Götze, Northcott, and Schuster 68-76). The payback period is the time taken to recover the amount invested in a project. Based on this case study, the initial investment = cost of a hybrid model – cost of the gasoline engine model) = (19,905 - 17,644) = $ 2,261. The expected annual net cash flow = $ 279.585. Therefore, the payback period = (2,261/279.585) = 8.087 years (Götze, Northcott, and Schuster 68-76). The following are some of the quality concerns related to the hybrid model: first, the car battery loses the charge faster during the cold season, thus increases the number of charging occasions. Second, the hybrid cars weigh less compared to gasoline engine cars. As a result, they easily get involved in accidents, especially during