Arnold Kling

Present Value of Prius

Arnold Kling, Great Questions of Economics
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Brad DeLong makes a simple present value calculation that shows that the Toyota Prius hybrid car makes economic sense.

Seven years of free maintenance--that's got to have a present value today of $2500. Increased efficiency implying a savings of $600 a year in gasoline costs at current prices--that's got to have a present value of $5000 today, plus whatever allowance for the risk of gasoline price changes we wish to include ($6500 in total?). Thus in buying a--fully-loaded--Prius, Richie paid $25000 and got back $9000 worth of maintenance, repair, and gasoline cost savings, for an NPV cost of only $16000.

Discussion Question. Do you think consumers will take into account these savings, or will they focus entirely on the sticker price?

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