finance paper

Running Header: To Buy or Not To Buy 1

To Buy or Not To Buy

Ian M. Martin

Student at East Carolina University


Abstract

As a rational American I try to do my best in saving whatever money I can throughout my everyday life. One easy way to try to try to do this is by cutting corners on the things that I don’t really think about, such as buying at cheaper grocery stores, or walking instead of driving. I figured that one easy way to cut back on cost in the long run would be to buy a hybrid car instead of a regular style car like I had been planning to. To decide whether this would actually be a good idea for me I conducted a scenario analysis with my base, best, and worst case scenarios while driving through the year with a new 2014 Nissan Pathfinder (2wd).


By looking at the net present value (NPV), the internal rate of return (IRR), and the

payback period I can decide if this decision would actually be worth the initial cost of the hybrid

itself. I used a 5% required rate of return for all three of my scenarios which I thought was a

pretty honest rate to use.

For my base case scenario I ended up with somewhat mediocre results. My NPV for this

case was $142 which I can’t really complain about (It is better than zero or a negative value but

not a large number that I was hoping for). My IRR for the base scenario was a 6.29% rate which

is just barely better than my required rate of return, and I had a payback period of 5.5 years. As

for my best case scenario, the results were far better, which is to be expected. I had a high NPV

of $1,617.52, and a very solid IRR at 18.49%. The payback period was a measly 3.8 years as

well. Finally I tested my worst case scenario. This time I came out with a negative NPV of -

$702.81, an IRR of -1.88%, and a very long payback period of 7.6 years

While evaluating these results I had to look at a few different things. I look at the NPV to

see exactly what the hybrid would technically be worth to me at the time that I buy it. Based off

of this it would be a tough call to accept or deny the purchase of the hybrid. While my best case

has a very high NPV I think that using my base case for most of the decision making process is

best. That being said, the base case didn’t really have that much value to me.

When looking at the IRR I have to compare its rate to my required rate of return of 5%.

Again this makes it a tough decision because while my best case is well above the rate, my base

case is just over one percent better, and my worst case would make it a bad decision all together.


The final component that I look at was the payback period for all of my scenarios. All of

my paybacks were pretty short relatively speaking. I think that I would drive a new car for at

least 10 years, and since all of my paybacks were less than 8 years I would have to buy the car

based off of just payback period.

Overall this decision to buy the hybrid car versus the regular car would be somewhat

tough based off of my three financial measurements. I think that I would have to accept in the

long run though. My base case doesn’t really give me any numbers that would blow you away,

but they are all good enough to make the purchase worth-while. While my worst case scenario is

really terrible, I don’t make any of my every day decisions in life based off of the worst thing

that could happen.

With this being said I think that it would actually a good decision to buy this hybrid

because I would not only most likely save a good but of money, but the longest payback period I

had was 7.6 years and I’m pretty positive that I would have the car for longer than 8 years.


Citations

Can a Hybrid Save Me Money? (n.d.). Retrieved April 17, 2015, from http://www.fueleconomy.gov/feg/hybridCompare.jsp

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