Prior design optimization efforts do not capture the impact of battery degradation and replacement on the total cost of ownership, even though the battery is the most expensive and least robust powertrain component. A novel, comprehensive framework is presented for model-based parametric optimization of hybrid electric vehicle powertrains, while accounting for the degradation of the electric battery and its impact on fuel consumption and battery replacement. This is achieved by integrating a powertrain simulation model, an electrochemical battery model capable of predicting degradation, and a lifecycle economic analysis (including net present value, payback period, and internal rate of return). An example design study is presented here to optimize the sizing of the electric motor and battery pack for the North American transit bus application. The results show that the optimal design parameters depend on the metric of interest (i.e. net present value, payback period, etc.). Finally, it is also observed that the fuel consumption increases by up to 10% from “day 1” to the end of battery life. These results highlight the utility of the proposed framework in enabling better design decisions as compared to methods that do not capture the evolution of vehicle performance and fuel consumption as the battery degrades.