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How to Decide to Buy a Hybrid Vehicle Using Financial Analysis

By Edited Jun 28, 2014 1 1

Toyota Prius
There are a lot of great "green" reasons to buy a hybrid vehicle. They reduce the carbon footprint with very low or zero emissions and reduce energy consumption just to name a few. In addition, by reducing our energy consumption we reduce our dependence on foreign oil. However, given the state of today's economy, you have to know how much money it will cost or save you by buying a hybrid vehicle and make an informed decision that is right for your individual situation.

Things You Will Need

A calculator and/or a computer with a spread sheet application are recommended but not necessary.

Step 1

Hybrid Ford Fusion
The first step is to decide on which vehicle you want to purchase. Compare models from the numerous major manufacturers that now produce hybrid vehicles. Look at mileage rates, warranties, other operating costs (costs not including the cost of fuel), and which type of vehicle best fits your lifestyle. Do you need a small car, have a family that requires a minivan or do you need the towing or cargo capacity of a pickup or SUV?

Step 2

Dollar Savings

Once you have decided on which type, make and model you want to purchase, it is time to do a side by side financial comparison of the hybrid verses a regular fuel powered vehicle. For the purposes of this article lets say you have decided on the Honda Civic Sedan. Determine the price difference between the two cars. For calculation ease lets say the hybrid Civic is $6,000 more than the regular Civic.

Step 3

Money Down The Tank

Determine your estimated mileage during the time you expect to own the car. As an example, you plan to keep the car for five years before buying another and you estimate you will drive 12,000 miles per year for the ownership period for a total of 60,000 miles.

According to the Honda website, the hybrid Civic Sedan gets an estimated 42 miles per gallon average and the regular Civic Sedan averages 29 miles per gallon. The difference is 13 miles per gallon. The hybrid Civic will use 1,429 gallons to drive 60,000 miles (60,000 miles / 42 mpg) and the regular Civic will use 2,069 gallons to drive the same 60,000 miles (60,000 / 29 mpg). The total difference is 640 gallons for the 60,000 miles.

Step 4

Hybrid Tax Breaks

Determine it there are any tax credits available for the make and model of the hybrid vehicle. Many state and local governments offer sales tax credits. Also the federal government offers tax credits for certain makes and models. The federal tax credits have been in a constant state of change so I recommend checking with your tax advisor at the time of the purchase. The car dealers are also a good source of information for the tax credits available for their cars but you still need to verify that they are still in effect. For analysis purposes lets say there is a $1,000 tax credit available.

Step 5

Gas Prices

The next step is to try to determine the price of gasoline or diesel fuel over the next five years. I realize no one has a crystal ball but there are sources, both government and private, that project costs at least over the short term. The price of gasoline has increased over 40% in the last year and most sources are in agreement that the price will continue to increase. For this analysis I will use gas prices at $2.50 and $4.50 per gallon assuming that these will be the average prices over the five year period.

Step 6

Using the information calculated in the steps above we can determine if the hybrid makes economic sense. The formula is as follows: (price difference – tax incentives) – (fuel savings) = net savings or additional costs. Using the above data: ($6,000 - $1,000) – (640 gallons saved @ $2.50 per gallon) = ($5,000)-($1,600) = $3,400 more to own and operate the hybrid Civic than the regular Civic. At $4.50 a gallon the hybrid will cost an additional $2,120 over the five year period. As you can see from the calculations, the higher the price of fuel, the lower the cost differential is between the two models. The same is true for driving more miles per year. The more you drive and the higher the price of fuel the lower the cost differential of owning and operating the hybrid becomes. As mentioned in the opening of this article, there are a lot of reasons to purchase a hybrid other than just financial. However, you should have all the facts, including the financial analysis before making a decision to purchase a hybrid or regular fuel vehicle.

The state of today's economy makes it necessary that you know how much money it will cost or save you by buying a hybrid vehicle and make an informed decision that is right for your individual situation.

Tips & Warnings



Dec 29, 2009 4:37am
A very detailed explanation... I will sure use some of these tips...
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