Economic Decision Making Essay

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Vinoth Kumar Sekar

EMGT6225 17534: Economic Decision Making

001724023

CASE STUDY ON MARKET SHARE OF HYBRID CARS
Hybrid cars are in the market since the late 1990s and have reached out well in the market. The economic and non-economic factors that influence the customer while making a choice between hybrid and non-hybrid cars are discussed below.

High Initial Cost
The hybrid cars have regenerative braking that recovers kinetic energy from the drive train during deceleration and stores the energy in a battery via a rectifier. When the vehicle accelerates or is in idle state, the drive train is supplemented by a traction ac motor which is powered from the battery via an inverter. Since there is a lot of complexity and retrofits compared to a conventional fuel burning car, the hybrid cars have a higher initial cost. The sticker price do not attract the customers to buy hybrid cars.
Hence the Government has come up with tax benefits and rebates varying from state to state which reduces the difference in price between the hybrid and non-hybrid version of the car.

Payback period
For instance, comparing the 2014 Acura I LX hybrid to the non-hybrid 2014 Acura I LX [1], the price difference is more than $2000. Considering an estimate of fuel savings of $500 per year, it takes about 4 years to get payback on the investment. It even depends on the usage of the car. If the user does not commute frequently, then the payback period will increase since the rate of savings depends on the vehicle usage.
Therefore the choice depends on the time value of money of the owner and the time horizon for using the car. If the buyer is planning to replace the car within 2-3 years, hybrid cars are not suitable. On the other hand, if the owner plans to use the car for a long period of time, the user can recover the capital cost and enjoy his returns in the form of fuel cost savings. The hybrid cars also have higher resale value when compared to normal cars as they are environment friendly and fuel efficient.

Maintenance Cost
Since the hybrid vehicles have a complicated dual drive system the cost of repair or maintenance tend to be high. It also demands a highly skilled worker in case of a breakdown or service. Moreover the weight of the hybrid car is more at the front due to the battery and drive train which is connected to the front wheels. Therefore the lifetime of the front tires are less compared to that of a non-hybrid car as they are subject to more wear and tear. Hence there will be a lot of difference in the cash flows between two alternatives in terms of maintenance cost.

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Vinoth Kumar Sekar

EMGT6225 17534: Economic Decision Making

001724023

Tradeoff with features
The savings depend on the driving style and utilizing the fuel in an economical manner. If the vehicle is driven in
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