Planning to buy a car?

This is a post based on Economic Rationale and not on an Emotional one. While most of the decisions we make in our life, have an emotional influence, at least it makes sense in understanding the economic rationale.

BUY VS HIRE

Are you planning to buy a car in the near future.   Just go through this mail and make an informed decision.

 

Alternative to buying a car is hiring one.  I have made a comparison of buying vs hiring

I have given the workings in an excel file enclosed.

I have made the working for a particular car  as an example and can be used for other cars as well .

 

I have chosen, the new Honda Mobilio with a very good mileage of 24 kmpl.  I have assumed this theoretical mileage in my calculation, even though in practice, the mileage would be less than this

 

When we buy a car, we incur,

  1. Cost of capital
  2. Registration charges and these two are one time
  3. Insurance charges year on year, though it may come down due to no claim bonuses . It is assumed that you don’t have an accident.
  4. You engage a driver and use it so that, you are rid of tension and use thetime to commuting work productively.
  5. The driver charges are assumed to increase 10% year on year
  6. It is also assumed that the petrol prices remain the same for the next three years.
  7. Depreciation at 10% using straight line method is calculated
  8. That there are two scenarios.  One, it is bought and used only in a personal capacity. Two bought for the organization and used for the organization and you claim,  tax benefits.

 

While working out on the alternative of hiring a car, the following assumption are made

 

  1. The current rate of Innova @ RS 16 per km is assumed. Since it wont be point to point, I have added another 50% for waiting and other parameters so that it becomes a meaningful comparison.
  2. The charges of hiring a car, increases @ 10%  per km every year.
  3. Since it is a hired car, there is no insurance charges, maintenance charges, depreciation benefits etc.

 

It is also further assumed that

  1. In the alternative option of hiring, the cost of capital equivalent to the cost of the car, is invested in a fixed deposit at 9% per annum interest rate.
  2. This is positive cash flow and is set off against the expenses

 

If the car is used for 3 years and disposed off,  the total cash out flow is 3.38 lacs

 

Disadvantages of hiring a car:

 

  1. You need to sometimes wait for the car to come.   I guess it is improving.
  2. You have to plan  a little bit.
  3. You cannot indulge in any activity at the time and moment you want.
  4. The driver could be a problem for you and spoil your party.

 

Advantages of hiring a car

 

  1. You could get to travel in new cars and literally in different cars every day.
  2. No dent, no scratches etc

 

 

Guidelines for making a choice.

 

  1. If you are not driving in your car, for more than one hour a day,
  2. If you don’t use the car for more than 500 km a month

 

 

 

 

Then the question is when should I buy a car?

 

You can buy a car, when you have

 

  1. Too much money and just not worried about this.
  2. a strong desire and intent to make a style statement
  3. feeling that your image in the eyes of the society, friends etc., is diminished
  4.  buying cars a hobby & You are a lover of cars and enjoy using them.

 

Summary –

 

Automobile is a depreciating asset and invest in this class of asset carefully.

I agree that mobility is of paramount importance and choose a car wisely.

 

 

 

 

 

varada

 

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