. Current MSRP of Toyota Prius is $24,200 and the MSRP for

| June 8, 2016

Question
1. Current MSRP of Toyota Prius is $24,200 and the MSRP for Corolla is $16,950. Both cars share the same size and features, and the only difference is fuel economy. If you are planning on purchasing one of the two cars and keeping it for 6 years, what is the minimum gas price that justifies the premium paid for the Prius?

The estimated mpg for Prius is 51/48 and Corolla is 28/37. The gas price currently is $2.5/gallon and you anticipate that it will go up in the future simultaneously with the inflation rate of 2% annually. Your opportunity cost is 7.5% and you will pay for either one of the two cars in cash. Assume that you will drive 15,000 miles a year with a total of 90,000 miles in six years.

Calculate the minimum gas price that justifies the premium paid for the Prius assuming that you will drive your car in town.

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