They’re selling the idea that hybrids are economical, and The New York Times has to be misleading to do so.
The goal is to tell potential buyers how long it will take to pay off the extra expense of a hybrid car.
But, their method is what’s called Payback Time.
In any basic finance book, this method is discussed, in the very first chapter on valuing net cash flows through time, as the method not to use. It is typically included in that chapter as a foil for better methods like net present value and internal rate of return.
The reason is simple: payback doesn’t include discounting (the idea that you’d rather have cash today than wait for it).
How bad is this problem?
It depends on how lousy the car is to begin with. For example, the Chevy Volt is so bad a deal that even The Times notes that payback would take 26 years.
Internal rate of return (IRR) is the second-best method, but perhaps the easiest to explain. It’s the rate another asset would have to provide to be better.
In the case of the Volt, if you held the car for 30 years … it would still only make sense as a purchase against an alternative investment that earns 0.8%.
Let’s put that in perspective. If your choice is to buy a Volt and drive it for 30 years, or buy a house in Detroit … you should probably buy the house in Detroit.
Things are far better for the Prius (but as most people know, the Prius really isn’t very green to begin with). The Times would have you believe it pays for itself in just under 2 years. That’s true, but only in a sense no one who has half a semester of finance actually uses. But, if you buy the Prius and keep it for 5 years, it’s IRR is 47%. That’s a good investment for you, but it’s not clear if it’s a good loss leader for Toyota: it does not count the trade secret of how much Toyota loses on each Prius — estimates range as high at $17,000 per car … although that estimate gets shouted down in polite conversation.
Somewhere in between is the Nissan Leaf: a seriously green car, whose return is not dragged down by inane UAW contracts. The Times reports that payback for this car is just under 9 years. More realistically, if you keep the car for 10 years your IRR will be 2.5%. That rises to 5.3% if you keep it for 12 years. Those are crappy returns. But, you’d need to keep it for 16 years to beat the 8% return routinely assumed by badly managed public sector pension funds.
I kept a car for more than 16 years. And even my parents made fun of me for that. Realistically … no one keeps a car that long.
It’s time to face the facts: a professional financial advisor could be jailed for recommending that you buy a hybrid car as an investment.
P.S. If you want to see my spreadsheets for these calculations, just ask.
* Yeah … I know … what’s new.