Quote:

Originally Posted by **GTO** __Option ONE : Retain your existing car__
• Rs. 4,25,000 : The resale value of your 5 year old C-segment sedan (e.g. Honda City) as of today.
• Rs. 20,000 : Averaged maintenance cost per year. Thus, you would spend a total of a lac over the next 5 years on a timing belt replacement, suspension overhaul, new brake pads and other required items.
• Rs, 35,000 : Total cost of insurance premiums for the next 5 years.
• Rs. 1,50,000 : Resale cost (realistic) of your 10 year old C-segment sedan in year 2013.
Thus, if you retain your existing sedan for the next 5 years, you will incur a total ownership cost of Rs. 4,10,000 OR Rs. 82,000 p.a. __Option TWO : Upgrade to a C+ segment car__
• Rs. 12,50,000 : Cost of a new Honda Civic or equivalent sedan.
• Rs. 4,25,000 : Proceeds from the sale of your existing sedan used as down-payment toward the new car.
• Rs. 20,000 : Approximate EMI per month for 8.25 lacs on a 5 year term.
• Rs. 6,000 : Averaged maintenance cost per year.
• Rs. 1,20,000 : Total cost of insurance premiums for the next 5 years.
• Rs. 6,20,000 : Realistic resale of your new C+ sedan in year 2013.
Thus, if you upgrade from a C-segment sedan to a C+ segmenter, you will spend a total of Rs. 11,55,000 over the next 5 years. OR 2,31,000 per year.
But that’s not the entire picture, is it? What we have not calculated yet is the opportunity cost of the Rs. 20,000 per month that you are blowing away toward the new car’s EMI. If you don’t upgrade, that money can instead be invested. Even if reasonably invested, the saved Rs. 20,000 per month will become a whopping 15 lakh rupees at the end of 2013!
Net net, retaining your current 5 year old sedan (over a 12.5 lakh sedan upgrade) will make you richer by 22.5 lakh rupees over the next 5 years! That’s an earning of Rs. 4,50,000 per year. OR Rs. 37,500 a month. |

GTO:

Excellent article. Some corrections in the calculation.

The principal of 20,000/month (12 lacs total) is double counted in the calculation. One while computing the cost of ownership and it is again counted when calculating the investment returns. Only the interest portion, 3 lacs in this case should be added to the overall savings. Also in the case of retaining the car, the 4.25 lacs is added to the ownership cost. Since the existing car is retained, the person does NOT gain/lose this amount to start with.

It's sort of confusing, let me try a simplified example:

**Assume at the start:** *Total Asset for Person A and person B*

* Cash in Hand = 12,50,000

* 5 year old Sedan

Let's say A and B chose different paths. Expenses are indicated in brackets since they are negative and outgoing.

**Person A retains his old sedan:**

__Total asset with him at the end of 5 years__

Initial principal = 12,50,000 (Say, invested in FD)

Interest = 3,00,000 (Based on your calculation. 5 years interest)

Money gained from selling old car = 0 (Since he does not sell at the start. He chose to keep the car at the start)

Car running expenses = (1,35,000) (Based on your math. Insurance + Maint)

Resale value = 1,50,000 (Finally when he sells)

Total asset at the end of 5 years= 15,65,500 and

**NO CAR** **Person B sells the car in hand and buys a new car with the 12 lacs in hand:**

__Total asset with him at the end of 5 years__

Initial principal in hand = 12,50,000

Interest = 0 [Since he cannot invest this amount. He chose to spend that towards the new car purchase]

Money gained from selling old car = 4,25,000

Initial Expense for new car = (12,50,000) [Assume full cash purchase]

Car running expenses = (1,50,000) [Maint and insurance]

Resale value = 6,20,000

Total asset at the end of 5 years= 8,95,500 and

**NO CAR**
At the end of 5 years, Person A will have 6,70,000 more than Person B.

** So the savings is 6.7 lacs instead of 22 lacs. ** **Some minor considerations:**
I made calculation for outright purchase instead of loan to make the computation simpler. If person B took loan instead of using the cash in hand, the only additional difference will be the interest he pays towards the loan minus the interest he makes with the cash in hand. For simplicity lets assume this difference is 1 %. It will not make much difference in 5 years time.

If we assume that both A and B never had 12.5 lacs to start with, still does not matter. Person A would have gained something like 15,00,000 at the end of 5 years by saving 20,000 per month which the person B does not get to save. Its only a matter of whether A saves the 15 lacs to start with or saves the 15 lacs over a 5 year period of time. B never gets to save that either way. B either spends the money over a 5 year period or spends all the money to start with.

Another minor point is if person A has 12,50,000 to invest to start with, person B has 4.25 lacs to invest at the start. A only has 8.25 lacs of extra money to invest compared to B.

Correct me

if my calculation is wrong.