Friday, October 3, 2008

Lowering Cost of Ownership

Anonymous has requested for advice via comment on my earlier post Overtrade for a New Ride?

Anonymous said ...
"tks for giving your perspective. I am in the same situation as this person. current monthly mortgage is 900+, and my car is coming to its 5th year in Dec. My car paper value is at $38k. a dealer has put together a package of both rebate and overtrade such that my monthly is lower at 900 over 7 years although I still need to come up with cash of $5k. from my perspective, it seems to make sense: I pay less per month, I have a shorter loan period (7 yrs vs 10yrs currently), and I get a new car. in this instance, would you agree that its OK?"

Based on the limited information, I can attempt to give a high-level analysis on the situation.

1) I will round down your current monthly instalment to $900 for ease of illustration.
2) You did not put down any downpayment for your current ride.
3) December 2008 is the changeover to the new ride.
4) The primary objective is to lower the Cost of Ownership and there are two perspectives to that too (A & B).
5) You will use the new ride up to its full useful life of 10 years.
6) Cost of Operating the Car is not included.
7) Net present value of cash or car is not computed.

A. Overall Cost of Ownership (full usable life of the Ride(s))

Current Ride only
Total Cost = $900 x 12 x 10 = $108,000

Cost per month = $900

Current Ride + Overtrade to New Ride
Total Cost = Payment on Current Ride up to December 2008 + Full cost of New Ride

Payment on Current Ride = $900 x 58 (2 months short of 5 years) = $52,200

Full cost of New Ride = $5,000 (downpayment) + $900 x 84 (7 year loan with $900 monthly instalment) = $80,600

Total Cost = $52,200 + $80,600 = $132,800

Cost per month = Total Cost / Total Useful Lifes = $132,800 / (58+120) = $746
The denominator (58+120) is the used life of current ride + useful life of the new ride.

B. Future Cost of Ownership (remaining useful life of the Rides)

Current Ride only
Cost per month = $900
for the next 62 months

Current Ride + Overtrade to New Ride
Total Cost for next 122 months = ($900x2)+$5,000+($900x84) = $82,400
Cost per month = $82,400 / 122 = $675.41

Thus, you can yield lower monthly cost with the overtrade if all the assumptions are correct. However, you should consider these factors when making your decision:

1. Is your financial health and job security in good shape to take up this deal?
2. Is the new ride at the same or better standard to your current ride?
3. Can you use your new ride to its full lifespan of 10 years? Analysis is based on full useful life.

Point 1 is key to a happier life - you will not enjoy your ride if you are constantly struggling in paying the monthly instalment and running costs (petrol, road tax, insurance, parking, maintenance, etc). Do take the time to make that decision and not get pressured by your dealer. Good luck!


Anonymous said...

Hi, would you be able to do an analysis between currency fluctuations and car prices / OMV / market / car distributors profits? With the current movement in korean / japanese currency, will be interested to know your thoughts. =)

skxly said...

Please see my response.