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?

43 views
0

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

> 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?

Tracking depreciation can matter if you want to know the change in your assets, such as when qualifying for loans. You may not plan to default on the loan but the lender will want to know what they could potentially come after to satisfy your debt, and how much that is worth.

Another reason the change in value is important is for taxation. If you get taxed on your assets then knowing that your car is reducing in value and by how much can be useful for reporting how much you will be taxed based on. Even if you don’t ever plan to sell the car you will be taxed.

Depreciation can be viewed as saving up for the next car. But that only applies if you do not take out a loan to buy a car; otherwise loan payments should be used instead of depreciation.

Or the guy in the video might be assuming that “cost” is impact on wealth, which includes value of the car. that is a bit of a theoretical computation.

You can always sell a car. It contains hundreds of pounds of valuable metals. The metals recycling industry exists because cars are so much better a source for iron than iron ore. Someone will always buy your car to shred it into metal bits because those bits are valuable.

And when it falls apart, you’ll have to buy another one. The capital cost of the car has declined to nothing at that point – that is what depreciation is supposed to account for. Selling it has nothing to do with it – from an accounting perspective, you’d balance the remaining (non-depreciated) value of the car against the sale proceeds anyway.

Not necessarily, you can think of depreciation from the aspect of a buyer and it becomes the replacement cost.

You might *want* to drive the car into the ground but what if an elephant stomps on it tomorrow? You need a new car and in theory you have insurance that will cover it’s replacement. But the insurance company doesn’t drive up and park an “Equal” car in your driveway. They will just give you the *value* of the car and wish you good luck. So in theory the depreciated cost is the value it would cost you to re-purchase an “equal” car in this contact.

Point being, if your 10 year old Civic gets destroyed you’re not getting paid out for a new Civic, you’re getting paid out for whatever your Civic was worth at the moment of destruction, in theory, a 10 year old Civic in similar condition.

Similarly, if for whatever reason you are using your car as an asset on a loan, they’ll only “count it” for as much as it’s worth. “any” Civic is not worth as much as a brand new Civic.

Outside of selling, buying, or replacing your car. Yeah, you probably don’t care terribly much about depreciation.