Thursday, June 5, 2008

Is it Time to Buy a Car Yet?

I have always wondered when it is economical for me to buy a new car. With the internet and home computers, I can do far more research and calculations than my father or grandfather were able to do at my age. The car that I currently drive is 15 years old. Technology has improved over the last 15 years and with gas prices at all time highs I thought it would be beneficial to put together a spreadsheet and determine what made sense dollar wise.

An engineer's favorite tool is the spreadsheet. It is not as elegant as a custom designed program, but can be created a lot quicker. I have made spreadsheets for everything, including finding out which insurance plan my company was offering would be the least expensive. So to start out my spreadsheet I needed to have an idea of what I was going to compare.

My baseline would be my current car. A 93 Dodge Intrepid. It is all paid for, and gets about 20 mpg. I drive it to work and not much else so I only put about 5000 miles on it a year now. However, to make it more conservative (since all of the newer models get higher gas mileage) I chose to use 9000 miles per year as my baseline.

Next I needed to choose what car to buy. While I could always look for the smallest car available and make the comparison uneven, I chose the Honda Civic. It is a smaller than the Intrepid, but works for my needs without being a spit dropping on the road. I selected 3 options from a 01 Honda Civic EX ($8600, 29MPG), a 08 Honda Civic EX ($18000, 31MPG) and a 08 Honda Civic Hybrid ($22,600, 43MPG).

I also decided to do a hypothetical analysis with the Chevy Volt. I assumed that it would cost $30000 and get 150 MPG equivalent (this is based on charging the car at night rather than running on the engine/generator in the car). I have not been much of a fan of hybrid cars because the initial cost outweighs the marginal increase in MPG. However, the Volt is configured more like a locomotive. The engine only operates the generator (thus allowing peak efficiency) to charge the batteries, which in turn provide power to the electric motors that run the wheels. Running just the engine (and not plugging it in) would equate to 50 MPG.

Several costs and variables go into the calculation, so I'll detail those here.

Cost of gas: This is a variable that can change pretty unpredictably. I used $3.50 constant for the entire 15 year analysis. Some may argue that this is too low. However, historically, this may be too high (just 10 years ago in 1998 I bought gas for 68 cents in Missouri). Gas is anywhere from 7% (Chevy Volt) to 35% (93 Dodge Intrepid) of the total cost of the vehicle. In the end, the price you predict for gas 5, 10, or 15 years from now is just a guess.

Financing rate: More than likely you are going to have some interest rate on your financing. The 0% gimmicks usually don't apply to used cars or cars that are in demand. I chose 5% over a 5 year loan. This might be a stretch for a used car, but should be reasonable for a new car.

Credit Card Interest rate: If you are someone who charges everything and then lets it sit on the card, you are paying interest on it. One way of figuring this is if you pay off something over two years, then the effective interest rate is the rate on your card (17%). Myself, I may charge it but I pay my bill each month so my interest rate is 0%.

Down payment: This is how much you pay up front.

Resale value: I assumed that the new car was worth 60% after 5 years, the hybrid and volt were 65% after 5 years and the used car was 50% after 5 years. I have seen some info that hybrids are maintaining their value better than comparable gas only cars. For the 10 year and 15 year I used 50% and 15% of their 5 year resale value for all cars.

Maintenance Costs: This is another guesstimate although there is a lot of data available on that you could use. A couple of things to keep in mind. As cars age, they require more maintenance. Also, maintenance costs go up with inflation each year. My current car I started at $1500 a year and increased it by $300 a year until it was at $3200 and then kept it level (at that point I would buy a new car anyway). The used Honda I started at $1000 and increased it by $250 a year until it was at $3200. For the new cars, I started them at $350 and increased it by $50 a year for the first 5 years. Then I jumped to $1000 and increased by $250 a year until it reached $3200.

Insurance/Taxes/Other: I elected not to include these because they don't contribute a significant percentage to the overall cost and they vary little between the vehicles in my area.

Inflation: Any cost analysis over time needs to normalize the numbers for inflation or they aren't comparing the same thing. In other words, a $1000 outlay now is more than a $1000 outlay 10 years from now ($1000 vs $737 at 3% inflation). I used a constant 3% inflation in my calculation.

After all of this, I assumed that I sold the car after 5 , 10, or 15 years and calculated the cost in comparison to my current vehicle. The table below is the results of the total 2008 dollars spent and the ratio with the current vehicle.

93 Dodge Intrepid

01 Honda Civic EX

08 Honda Civic EX

08 Honda Civic Hybrid

Chevy Volt

Total Present Cost After Resale -5 Year











Total Present Cost After Resale -10 Year











Total Present Cost After Resale -15 Year











I found the results rather interesting. For my situation, keeping my current car running over the next 5 years is the cheapest option (but only by 4% max -- the Volt isn't available for me to buy). This was what I suspected, although the minor cost difference was unexpected, I was estimating more like 10%.

Over the long run, buying the new gasoline Honda Civic is cheapest. Again, not by much though. This was unexpected, my previous thoughts were that the used car would be less expensive.

Finally, one last conclusion from this data is that cost ratio peaks at around 10 years for new cars. So it appears that it is advantageous to buy a new car every ten years. Unless I overestimated the maintenance expenses for the used cars. A couple of years with much lower expenses and the difference disappears.

For the Hybrid to be the least cost, all other assumptions staying the same. I would have to be driving 15000 miles or more a year. For the Volt to be the cheapest, it would have to have a price of $26000 or less. So, what I decided from this is I will probably keep my old car running for another few years and then buy a new (or nearly new) gasoline car. By that time the Volt should be on the market and I can analyze it better for its overall value.

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