Payback Period and NPV of a Cost Reduction Proposal—Differential Analysis
Hermione decided to purchase a new automobile. Being concerned about environmental issues, she is
leaning toward the hybrid rather than the gasoline only model. Nevertheless, as a new business school
graduate, she wants to determine if there is an economic justification for purchasing the hybrid, which
costs $1,595 more than the regular model. She has determined that city/highway combined gas mile-
age of the hybrid and regular models are 30 and 24 miles per gallon respectively. Hermione anticipates
she will travel an average of 12,000 miles per year for the next several years.