Doesn’t factoring depreciation into the cost of car ownership rely on the assumption that you will eventually sell that car? If so, why is that a reasonable assumption?

Question

Recently watched [this video](https://www.youtube.com/watch?v=ztHZj6QNlkM) which puts a significant chunk of the cost of owning the vehicle into depreciation. Wouldn’t the loss in value of the vehicle only matter to me if I bought this car with the intent to sell it in the future? I *could* drive the car until the engine block falls apart and it becomes basically unsellable.

In: 2782

Answer 1

If you drive a car until it is worth nothing, then your depreciation is 100% of the car’s value. Let’s look at two scenarios:

You buy a car for $20,000 and drive it for 15 years at which point the engine blows up. A local scrapyard pays you $250 for the car and comes to tow it away. Your depreciation was $19,750 (98.75%) over 15 years, or about $1,317 per year.

You buy a car for $20,000 and drive it for 10 years at which point you sell the car for $4,000. Your depreciation was $16,000 (80%) over 10 years, or about $1,600 per year.

In both cases, the loss of value represents a cost to you. Most people tend to focus on their cash flow, but ignore their balance sheet. Your income statement tells you about your income and expenses, but it doesn’t consider the value of assets.

For example, if you buy a car for $20,000 cash, that cash immediately leaves your bank account, but you receive an asset in exchange for the cash. In finance terms, you’ve exchanged one asset (cash) for another asset (a car). The dollar value of the car goes down over time, so from an accounting perspective, we would track the value of the car just like we would the cash balance of a bank account. At the end of your term of ownership, you would typically convert the car back to cash by selling it. That’s why it’s important to track depreciation.