**Small Business Taxes & Management ^{TM}**

With the price of gas expected to approach or exceed a record high this year and little hope that prices will drop significantly in the near future, many individuals and businesses are looking to replace gas guzzlers to save money. But how much will you save? The amount depends on three factors--gas mileage of the old and new vehicles, the number of miles driven during the year, and the price of gas (or diesel). We've worked up two formulas that you can use to quickly compute the savings. Putting the formula in a spreadsheet will not only make the computations easier, you can analyze more vehicles and/or use different assumptions for fuel costs, miles driven, etc.

The first formula is a special case of the second. This formula is a little simpler to use, but only applies if the cost of fuel is the same for both vehicles. For example, car A uses regular gas and the potential replacement vehicle, car B also uses regular. The second formula is used to compare vehicles using different fuels. For example, where car A uses regular and car B uses premium fuel or diesel.

Both Cars Use Same Fuel

If both cars use the same fuel, you can use this formula:

Savings = FP x MD (1/M1 - 1/M2)

Where:

FP = Fuel Price

MD = Miles Driven per year

M1 = Miles per gallon of old car

M2 = Miles per gallon of new car

Fred is considering buying a new, more fuel efficient truck. He drives 16,000 miles per year and the price of regular gas (used by both the old and new truck) is $3.75 per gallon. Truck 1 gets 14 miles to the gallon; truck 2 is expected to get 19 miles per gallon. The savings would be:Example:

Savings = 3.75 x 16,000 (1/14 - 1/19) Savings = 60,000 (.07143 - .05263) Savings = 60,000 x .01880 Savings = $1,128

The savings would be $1,128, based on the price of fuel, miles driven, and the 19 versus 14 miles per gallon of the two vehicles.

In the formula we refer to the miles per gallon of the old and new car. That assumes you're looking at a replacement. Obviously, the formula works as well when comparing two new cars.

We converted the 1/14 and 1/19 to decimals because it's easier when using a calculator. If you feel more comfortable manipulating fractions (you'll have to find the lowest common denominator), you'll get the same result. You might want to store the result of what you get from evaluating the numbers in the parentheses. You can use it to do a sensitivity analysis using the price of a gallon and the miles driven. For example, $1,128 might not be enough of a saving to make you dump your current truck. But what if gas goes to 4.75 and you drive 20,000 miles? The savings would be 4.75 x 20,000 x .01880 or $1,786.

See below for some notes and comments.

Each Car Uses Different Fuel

This formula is only slightly more complicated:

Savings = MD (P1/M1 - P2/M2)

Where:

MD = Miles Driven per year

P1 = Price of fuel (per gallon) used by old car

P2 = Price of fuel (per gallon) used by new car

M1 = Miles per gallon of old car

M2 = Miles per gallon of new car

Fred is considering replacing his existing gas car for a diesel. He drives 16,000 miles per year and the price of regular gas (used by the old car) is $3.75 per gallon. The price of diesel is $4.20 per gallon. The old car gets 20 miles to the gallon; the new diesel is expected to get 41 miles per gallon. The savings would be:Example:

Savings = 16,000 (3.75/20 - 4.20/41) Savings = 16,000 (.18750 - .10244) Savings = 16,000 x .08506 Savings = $1,360.96

Practical Points

If your current car is fairly new, it probably doesn't make sense to sell it at a loss to buy a new diesel or some other much more efficient auto. On the other hand, if you're currently shopping for a new car you may want to seriously consider a diesel or a hybrid, particularly if you intend to keep the car for more than a couple of years.

The same may be true for a hybrid. And some hybrids get significantly better gas mileage than some other models. Many SUV hybrids get only slightly better gas mileage on the highway; the savings are very unlikely to justify the cost.

Finding the true miles per gallon is likely to be difficult. You can use the published figures, but their reliability varies and is suspect. In some cases the actual miles per gallon may be more; in most cases less. In addition, the type of driving you do is an important factor in the savings generated. For example, if all your trips are typical of city driving use only those mile per gallon numbers to compare vehicles.

If you're considering a hybrid, keep in mind that the city savings will probably be much more than highway savings. For example, one popular SUV hybrid gets 34 miles per gallon in city driving versus 20 miles per gallon for its regular sibling--a 14 mile per gallon difference. On the highway, the hybrid gets 30 miles per gallon versus 26 for the nonhybrid version. Only 4 more miles per gallon and an even smaller difference on a percentage basis. Inaccuracies aside, the hybrid probably makes sense for city drivers but those who drive primarily on the highway won't recoup the extra cost for many years, if at all.

One obvious way to save is to use your most fuel efficient vehicle for most activities. Save the big truck for jobs you can't do in a car.

Use the formulas above to compute potential savings as a starting point. Then use the number in conjunction with a capital analysis. That is, do the savings over a 3, 5, or more year period to justify selling your current vehicle and replacing it. If the vehicle is used for business, you've got to factor taxes into your analysis.

You've also got to consider the total cost of ownership. That is, the acquistion cost, plus maintenance, fuel and depreciation. Some independent sources compile and publish this information. If your driving is limited, the cost of the fuel is a small part of your total cost.

Copyright 2008-14 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

**--Last Update 07/02/14**