Friday, April 13, 2012

Keep a 9 y.o. Car or Replace it with a Hybrid?

I own a sporty 4 door sedan with almost 70,000 miles on it. It's a good car that will likely serve me well for another 6 to 10 years with proper maintenance. It does require premium gas and its average real world 20 miles-per-gallon (mpg) is decent. Could a high efficiency hybrid car be a less expensive choice in the long term?

The general question is: What is the total cost of a new and a used car and how can one estimate it? Each person's choice will vary so I use my case to illustrate the approach.

The only high-mpg alternatives to my car are the 2012 Toyota Camry LE Hybrid and the 2012 Hyundai Sonata Hybrid. The remainder of the hybrids are too "sleepy", too large or too expensive for me.

I chose to make comparisons with the Camry. It is less sporty that my current car but various magazine tests praise it for its good acceleration and good fuel efficiency. It is rated at 43 mpg city so I assumed a 40 mpg for my estimations. Having used a rented Prius for a few days I confirmed that its city mpg is as good as advertised at 51 mpg. I excluded the Sonata despite the fact that it is $4,000 less expensive than the Camry because tests have shown that its real world mpg is worse than its EPA rating of 35 mpg city. [1] According to both have a similar 5 year total cost to own. [2]

Real world mpg is important and EPA has revised the rules because of large deviations. For example, I did complain to Honda in 2000 because my 1999 Accord LX rated at 24 mpg city never did any better than 20 mpg even with a bit of freeway use thrown in the mix. In 2011 Honda had bigger problems with its Civic Hybrid (lawsuits about the claimed mpg) which stresses the importance of the real world mpg rating in different areas by different users.

There are many variables in this long term calculation, some more important than others:
  • Length of analysis: 6 years and 10 years.
  • Out the door cost of the new car: $29,160.
  • Current value of the 9 y.o. car: $9,500.
  • Insurance and registration: I called my insurer to find out today's premium for the 2012 Camry Hybrid: 5% higher than my current car. Registration is the same at $300 per year.
  • Usage: this is hugely important in comparing a high mpg to a low mpg car because high use makes the high mpg car cheaper in the long term. My scenario was for 6,000 miles per year which is what I averaged in the past three years. I also run the numbers for 10,000 miles per year.
  • Tires: New set of tires costing $800 every 30,000 miles.
  • Maintenance: annual average cost of $900 for the 9 y.o. car and $300 for the new car based on past experience. In other words, in the next 10 years it’ll take $9,000 to keep the 9 y.o. car in very good shape and $3,000 to do the same with the new car.
  • Cost of fuel: this is another critical variable because fossil fuel pricing will be quite uncertain in the future. There is no doubt that the price of fuel will fluctuate a lot between 2012 and 2022. Some argue that new large deposits will be found, Libya’s production will come up to normal soon and China’s thirst for oil will be leveling off. Others point to the diminishing reserves (they are good for up to 100 years more) and the large unrest likely in the Arab peninsula, like Syria or worse. So I run three scenarios of average annual price change of -4%, +2%, and +5%. I explain each scenario below.
Today's oil price is about $105 per barrel. When President Obama took office the price was $35 per barrel. Many analysts expect that in the next decade the price of oil will average $50 to $80 per barrel, so gas may be cheaper than it is today. This is represented by the -4% scenario. In this scenario, today’s unleaded gas is $4.35 per gallon and the average price in the next 10 years will be $3.65/gln. (All prices mentioned are in today’s dollars.)

The 2% scenario assumes that the current level of oil price per barrel is high, that it will drop some time after the 2012 elections and then begin to grow again resulting in a mild average increase. In this scenario, today’s unleaded gas is $4.35 per gallon and the average price in the next 10 years will be $4.76/gln.

The 5% scenario assumes major unrest in Saudi Arabia or another calamitous event that affects oil prices. In this scenario, today’s unleaded gas is $4.35 per gallon and the average price in the next 10 years will be $5.47/gln.

The estimation of total costs takes quite a bit of analysis. The figure below shows the calculation for one car, one mileage scenario and one gas price scenario. The final results require 12 estimations like this.

The results are summarized in the table below. The obvious result is that regardless of gasoline pricing scenario, the car with 40 mpg city is a good choice for high annual mileage users. In my case, staying with what I've got is the smart choice.


[2] Hyundai: True Cost to Own®: $42,406 -- Toyota: True Cost to Own®: $42,915 (both are 5 year estimates) from [1]