This paper presents a new augmented molecular mechanical potential that incorporates significant quantum mechanical effects for proton and hydride transfer reactions in solution and in enzymes. The solvent is treated explicitly, specified covalent bonds in the solute are allowed to break and form, and the charge distribution of the solute is allowed to vary smoothly from that of the reactant to that of the product during the reaction. Moreover, in order to incorporate changes in bond order and hybridization, an efficient constraint dynamics method is combined with switching functions to smoothly vary the structure of the complex from the reactant to the product structure during the reaction. This new methodology is applied to model nicotinamide adenine dinucleotide (NADH) hydride transfer reactions, in particular to the oxidation of ethanol by the NAD(+) analog 1-methyl-nicotinamide in acetonitrile and in water. Both cis and tracts orientations of the NADH amide sidearm and both protonated and deprotonated forms of the substrate are studied. The structures and charge distributions of the model complexes are obtained from ab initio gas phase geometry optimizations at the Hartree-Fock 6-31G* level and are utilized to parametrize the potential energy surface. Classical free energy curves in both acetonitrile and water are calculated in order to illustrate the solvent effects on the energy gap between the reactant and the product states. The radial distribution functions between the solute and the water molecules together with the orientational distributions of the hydration shell water molecules are also calculated in order to elucidate the nature and extent of hydrogen bonding between the solvent and the solute.