Payback Period of a Toyota Prius Vs. Ford Fusion
A Toyota Prius is a better buy than a Ford Fusion after a little over five years of ownership, given a 10% discount rate and a typical commute of a San Diego driver. The Prius is a better buy because of its better gas mileage. It is more expensive to own than the Fusion until the fifth year because of the Prius’ higher upfront cost.
In comparing the ownership costs of a hybrid versus a non-hybrid, the Toyota Prius was chosen because it is one of the more affordable hybrids, and is a likely choice as the next vehicle of the author. The Ford Fusion was chosen as the comparison car as it is in the same class (midsize) as a Prius. On many vehicle guide websites, these two cars are listed in the same categories. Due to the hybrid system, the Prius has a higher base MSRP of $24,200 compared to the Fusion’s base MSRP of $21,700.
Assumptions had to be made about the yearly driving habits to compare the gas mileage costs of the two vehicles. It was assumed that each car would drive 8,020 highway miles a year and 3,650 city miles a year, as the author envisions a future in which he lives and commutes to work in San Diego (see appendix for the breakdown of how these numbers were generated).
The future cost of gas must also be forecasted. When one plots an exponential trend line to the historical average price of a gallon of gas in California, there is a good fit with an r-squared value of 0.8701. This is a better fit than a linear trend line, which has an r-squared value of 0.7651. Using this exponential trend line, gas prices were forecasted for the future with an expected gas price of $4.31 in 2018 and $5.46 in 2023 as can be seen in the graph below:
It should be noted that gas prices are part of a volatile market that is rife with missed forecasts and these numbers could eventually be quite different – although no one is expecting gas prices to decrease greatly from their current price.
The ownership costs of a Prius are a significant amount less than a Fusion, especially as time, and thus gas price increases. This is due to the Prius’ hybrid engine, which has an MPG of 51 for city and 48 for highway, compared to the Fusion’s MPG of 22 for city and 34 for highway. For example, after ten years of ownership, the total gas cost for the Prius is $11,440.41 compared to a cost of $19,260.93 for the Fusion. The insurance and licensing costs of the Prius were assumed to be the same as the Fusion’s at $1,616 per year. The tires and maintenance costs were assumed to be $627.85 per year for each vehicle. The verdict is still out on whether or not a hybrid costs more to maintain, although most recent evidence shows that newer models are similar to non-hybrid cars in maintenance costs.
In terms of nominal dollars, the sum of ownership and purchase costs for the Prius is less expensive than the Fusion a little after four years of ownership, as can be seen in the graph below:
However, we must account for the discount rate as the benefits from the savings in the future are worth less than the extra upfront costs that must be paid now to buy a Prius. Given a 10% discount rate, the Prius is still clearly a better buy, as after roughly five and a third years, the net present value of owning a Prius is $0 as can be seen in the graph below:
Note: The net present value, given a 10% discount rate, between the ownership costs savings of a Toyota Prius versus a Ford Fusion. These were calculated by taking the difference of the initial purchase price of the vehicles, and the yearly difference of ownership costs. The present value for each year calculated using the formula PV = Savings / (1 + Discount Rate) ^ Year Since Start. These were summed to find when the net present value was $0, which meant that the Prius costs were equal to the Fusion costs.
After this date, the Toyota Prius is less expensive to own than the Ford Fusion. Since the typical ownership length of a car is 5.95 years, the Prius is the better buy.
Breakdown of mileage per year calculations:
A work commute from the San Diego neighborhoods of Pacific Beach to Clairemont Mesa was used. This is a 30 mile roundtrip commute, and was assumed to be done five days a week, 50 weeks a year (7500 miles). As well, it was assumed that five miles per day on the weekend were driven on the highway (520 miles). This is a yearly total of 8020 miles on the highway. Given the need for groceries, shopping, and commuting to the surf, it was assumed that there were 10 miles driven in the city per day for the entire year, for 3650 total miles on city streets.