The economics of buying a fuel-efficient car can be misleading. Critics of hybrids and electric cars often say, “They’re not worth it.” That’s because their calculations about payback period—how long it takes to recoup a higher upfront cost—often exclusively look at fuel savings, based on higher MPG. What number crunchers fail to consider is resale value.
According to FuelEconomy.gov—a consumer information website managed by the U.S. Department of Energy and U.S. Environmental Protection Agency—the MSRP of a 2012 Toyota Prius is $4,315 more than a 2012 Toyota Matrix. But given the Prius’s 50-MPG rating, compared to the Matrix’s 27.5 MPG, a buyer will see a payback of the extra upfront cost in 4.7 years. A Ford Fusion Hybrid versus its 2.5-liter gas sibling means a payback in 4.4 years. And for some model comparisons, like the 39-MPG Lincoln MKZ Hybrid and its gas version that carries an identical price tag, the payback is immediate.
But these payback calculations completely change when you take resale into consideration. Especially when gas prices are high, hybrids and EVs can retain thousands of extra dollars of resale value compared to less efficient models. In other words, when it comes time to sell, any extra upfront cost comes right back. The gas savings during the ownership period becomes a bonus. Conversely, owners of large inefficient trucks and SUVs can be fleeced when they sale their gas-guzzlers, usually in a rush when the price of gasoline skyrockets.
A 2011 Carnegie Mellon University (CMU) study, using auction data from Manheim Auctions, validated the high-MPG resale advantage. CMU showed that after three years of ownership, the Toyota Prius and Volkswagen Jetta TDI (an efficient clean diesel vehicle) retained greater percentage of their initial purchase price than the conventional gasoline vehicles. Researchers observed a resale ratio of approximately +0.3 in the summer of 2008 as gasoline and diesel prices rose to record levels.
More recently, the June 2012 edition of the National Automobile Dealers Association’s Used Car Guide declared that the average trade-in value, after one year, for a typically equipped 2011 Leaf SV electric car would be $23,975—or 95 percent of its sticker price of $25,280, after the $7,500 federal tax credit. (NADA considers tax credits and rebates just like any traditional cash incentive.) The projected trade-in value of the 2011 Chevrolet Volt, according to the NADA guide, is $29,325—or 90 percent of its post-incentive $32,780 sticker price.
The values for Leaf and Volt are projected to decline a bit more in the five-year time frame—mostly based on an expectation that more capable plug-in cars are expected by mid-decade. But hybrids, which have been on the U.S. market for more than a decade, are projected to continue retaining high resale values in coming years.
When you add everything up—the luxury features that come standard on many hybrids and EVs (creating an uneven comparison), tax incentives usually not included in ROI calculations, and strong resale values—the economics tilt even more strongly in favor of the most fuel-efficient cars on the road. Also, there is the added societal and environmental benefit of reduced emissions and less dependence on foreign oil. To a growing number of consumers, that’s priceless.
Photo Credit: gvgoebel