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Are Hybrid Cars Good Deals?
Let us compare Toyota Corolla to Toyota Prius.

Hybrids are hot these days. Seems like they come with many benefits. So let us drill down and see if they are good deals.

One of the most famous Hybrids out there in the market these days is Toyota's Prius. So let us concentrate on it. A model of Toyota that compares well in size, power, look, feel to Prius is Corolla. So let us compare two of them *quantitatively*. Purely in terms of money. Qualitative factors are hard to measure and they are left for blind-lovers or hard-code-haters so they can justify their love or hate for something! So we are concentrating only on the monetary aspect of these two vehicles here.

* Cost of Prius Vs Corolla:

Toyota Corolla is listed at around 15,000USD but you can mostly get if for around 13,500$. Thanks to the competition by Honda Civic, Nissan Centra and hundreds of other similar models.
On the other hand, Prius is listed around 23,000USD for 2007 model. Because hybrids are hot (thanks to tax benefits and high Gasoline prices), it is very difficult to get any discounts. At one point, they were sold at premium to the MSRP!!!

So the price advantage is roughly around 9,500USD.

* Tax Advantage:

Used to be pretty good for Hybrids but it is going to go away completely from October 1, 2007.
Click here for details:

"The tax credit for buying a Toyota hybrid vehicle will begin to fade away October 1. Federal law requires that the tax credit for buying a hybrid vehicle begins to phase out during the second calendar quarter after the quarter in which the company sells its 60,000th hybrid. Toyota reports its cumulative sales of qualified vehicles to retail dealers has reached the 60,000-vehicle limit during the calendar quarter ending June 30, 2006, according to the Internal Revenue Service. Vehicles purchased before Oct. 1, 2006, qualify for the full credit. For Toyota hybrid vehicles bought on or after October 1, 2006, and on or before March 31, 2007, the credit is 50 percent of the otherwise allowable credit amount. Taxpayers buying vehicles on or after April 1, 2007, and on or before September 30, 2007, can only get 25 percent of the credit.

For Prius, credit amounts for April 1, 2007 to September 30, 2007 is $787.50
Beginning October 1, 2007, taxpayers who buy a Toyota hybrid cannot claim the related tax credit.

So after adjusting tax benefit, the net cost difference is 8,500$.

* Gas Mileage MPG

Hybrids are sold on two things: Environment and Savings in Gas. As gas prices go up, Hybrids seem more and more attractive.

Let us do a 2 minute quick analysis:

Toyota Corrola gives 30/38 so assuming 50% street and 50% highway, we get 34 miles per gallon.
For Prius, it gives 60/50 mpg so assuming 50% on street and 50% on Highway, we get around 55 miles per gallon for Prius.

Now let us assume that you drive 1,500 miles per month.(This is on the higher side as normally people drive around 1000 miles per month) If you drive Corrolla, you will need 44 gallons of gas per month and if you were to have Toyota Prius, you can expect to need 27 gallons of gas per month. So the savings is 17 gallons if you are driving 1500 miles per month (and if you are driving 1000 miles on average, the savings is 12 gallons per month)

Let us assume gas price per gallon. If we look at last two years prices, they are around 3$ per gallon. (If you look at last 10 years prices, the average price is I guess 2$ per gallon)

Now we need to make another assumption: How long do you expect your Hybrid or Corolla to last? Let us assume 10 years.

So monthly savings of 17 gallons will be 200 gallons per year so for over the life of the car, we can expect to save 2000 gallons. So if we assume average gas price of 2.5$, we are saving 42$ worth of gas in a month and 5000$ of gas over 10 years in nominal terms. And remember, we have to pay 8500$ upfront for this 5000$ savings over 10 years!!

Now let us assume that we borrowed 8500$ for Prius at 10% per annum. If we were to look at the interest rate/return at 10% per annum on the excess 8,500$ that we are paying upfront, it turns out to be 71$ per year. So you savings in gas of 41$ per month does not even meet the 71$ that you are paying per month for the 8500$! So on the net level, by going hybrid and selecting Prius over Corolla, we are losing 30$ per month and 8500 upfront!!!