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Electric Cars: The Right and Wrong Reasons for Buying

Stocks in this article: GM TM

The issue doesn't stop there, however. There are other things for which we need to account.

Let's start with the depreciation of the battery. Different electric cars have batteries that cost anywhere between $2,000 and $32,000 upfront. So gee whiz -- the cost of depreciating this battery will vary widely.

Over how many years is an electric car's battery warrantied? Mostly eight years, sometimes 10. That doesn't mean that the useful life is eight or 10 years. That's just the minimum. Is the average 15 years? 20? More? This is obviously in dispute.

Let's take a simple example of an electric car battery having an useful life of 15 years and cost of $15,000. That's $1,000 per year in amortization/depreciation. That $960 per year in gasoline savings? Poof!

The point here is the cost argument overall is in dispute. It all depends on the assumptions. Clearly, over time these numbers are moving in the electric car's favor at this point, mostly as a result of falling battery prices.

You will hear that batteries are falling in cost from 5% to 8% per year on average. I believe they are falling in cost a lot faster right now for car applications. It's not just about the basic battery chemistry but also cooling, heating and packaging these batteries inside a car. We are probably in the middle of a period in which car battery costs are falling much, much faster than 8% per year right now.

Overall savings will also depend on your personal circumstances and how much you are driving. One big variable: How much are you paying for electricity? It makes a world of difference if you are paying 5 cents per kWh or if you're paying 20 cents.

What about cost of gasoline over the lifetime of the car? This is obviously the other side of the coin. Again, it makes a world of difference if you are assuming $3 per gallon, $6 per gallon or even worse.

If you don't drive very much, you may be better off with a gasoline car. On the other hand, if you're driving 35 miles to work every day, another 35 miles coming home, have access to inexpensive electricity, and you are guarding yourself against sharply increasing gasoline prices, then an electric car may be for you -- strictly based on cost.

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