## Friday, September 5, 2014

### Problem set two -- household vehicle purchases.

Fuel Efficiency Economics Problem Set Two:

A previous post considered household payments on vehicle loans and gasoline.   The household was assumed to purchase both a SUV and a sedan and use both cars for 10 years.

This post asks the reader to build on a modified SUV-SEDAN Problem with different data and different assumptions.

Question One:  The table below has fuel efficiency and purchase price (not MSRP) data for four vehicles.

 Overall Fuel Efficiency Purchase Price Ford Explorer 23 \$33,000 Honda Pilot 21 \$35,000 Toyota Prius 42 \$25,000 Toyota Corolla 35 \$17,000

The household drives 35,000 miles per year.   60% of driving occurs in the SUV and 40% in the sedan.

Analyze each of the four SUV/SEDAN combinations.

The household buys both the SEDAN and the SUV at the beginning of a 10-year period.   The household takes out a six-year loan and makes an initial down payment of 30% for each car.

The loan interest rate is 5.0%.

The price of gasoline is \$4.00 per gallon.

Analyze each of the four SUV/SEDAN combinations.

Find the following:

The monthly household gasoline bill
The monthly car payments
The present value of all gasoline consumed over the period.
The present value of the vehicle purchase costs over the period.
The total present value of all payments

Discuss travel related costs for the four SUV/SEDAN options under the assumptions given in this problem.

Question Two:  Redo the analysis above but assume that the household purchases the two vehicles with a 10% down payment and that the interest rate on the loan is 12%.

Discuss the impact of the higher financing costs on the decision to purchase fuel- efficient vehicles.