Serves the Commercial Small Fleet Market of 10 – 50 Vehicles

Will Keeping Vehicles Longer Lower Depreciation Expense?

March 2005, by Terry Flesia, features editor

The prevailing theory has been that the longer you retain any vehicle the lower the net depreciation on that vehicle. Not so fast. We studied residual values on a pair of intermediates, minivans and pickups. Interestingly enough, the numbers showed that bit of depreciation wisdom did not always hold true.We’re not saying that “short cycling” fleet vehicles will always result in a lower net depreciation expense. But it does pay to chart the depreciation peaks and valleys of certain makes and models to establish the optimal resale point. With that in mind you can weigh other factors such as maintenance costs and fleet usage issues to determine the best replacement cycle for you. Intermediates Hold To FormWe first took a look at a pair of intermediate sedans, which we call model A1 and A2. We used Automotive Invoice Service (AIS), a new-car cost guide, to establish 2001-model new vehicle prices, and Black Book, a used-vehicle guide, to determine residual values. We tracked these two intermediates from months 16 through 50 in their service lives.We assumed that these two intermediates were averaging 2,000 miles per month. We plotted Black Book-Clean values each month for 35 months (16 through 50), from March 2002 to January 2005. We deducted for high mileage. We established net values as though we had sold the vehicle at each month during those 16 to 35 months of service life. Those values were then subtracted from the vehicle’s original cost to establish a monthly net depreciation value.

That depreciation expense was then recalculated to an average net depreciation per month for comparison purposes. Graph 1 illustrates the result. As expected, the old wisdom of retaining your vehicles longer to achieve a lower net depreciation expense held true. Model A1 depreciated a net average of $357 at 24 months and 48,000 miles, $334 at 36 months/72,000 miles and $287 at 48 months/96,000 miles. Model A1 incurs depreciation expense of about $850 less annually by selling it at 48 months rather than 24.The situation was even more pronounced with the A2 intermediate. Depreciation expense worked out to $306 at 24 months, $259 at 36 months and $229 at 48 months. Annually, you would save almost $925 by retaining the A2 model to 48 months as opposed to retiring it at 24 months. Minivans DeviateWe then looked at two 2001 minivan models using the same criteria used on the two intermediates. We expected to get similar results—but that did not turn out to be the case, as illustrated on Graph 2.

At 24 months and 48,000 miles the B1 model incurred an average depreciation expense of $258 per month. At 36 months/72,000 miles the average depreciation expense climbed to $283 per month. Yet at 48 months/96,000 miles, monthly depreciation flattened out at $283. The B1 minivan would cost you a little over $300 annually to retain it for 48 months rather than for 24. All things being equal, you’d lose money in depreciation expense by holding onto the vehicle longer.The B2 minivan model, while experiencing a lower depreciation expense all around, nonetheless followed a similar pattern. At 24 months/48,000 miles, average depreciation expense worked out to $185 per month. At 36 months/72,000 miles it was very close to the 24-month expense at $182 per month. And at 48 months/96,000 miles it climbed to $222. Thus the B2 model would cost you close to $440 each year in additional depreciation expense to retain it for 48 months versus retiring it at 24 or 36 months.{+PAGEBREAK+} Pickups Follow SuitThe minivan results seem to contradict the “retain them longer and reduce depreciation expense” wisdom. What about pickups?Graph 3 illustrates the results of a study of two small, regular cab pickup trucks. Once again the old theory does not hold true. The C1 model produced an average net depreciation expense of $151 at 24 months/48,000 miles. Depreciation increased to $170 per month at 36 months/72,000 miles, yet dropped to $150 at 48 months/96,000 miles, almost the same as it was at 24 months. Given that maintenance and repair costs would most certainly run higher at 96,000 miles than 48,000, it would not seem prudent to hold this C1 model pickup over the longer period.

The C2 pickup model results, while significantly less in depreciation expense than the C1 model, nonetheless followed the minivan pattern. The C2 model incurred $95 net depreciation per month at 24 months/48,000 miles, increasing to $123 a month at 36 months/72,000 miles, and inching up to $126 monthly at 48 months/96,000 miles it inched up to $126 per month. Therefore your cost is about $375 more if you hold the C2 model until 48 months as opposed to 24.Why the Different Results?Why is depreciation expense lower for the intermediates when retained longer, yet not for the minivans and pickups? Mileage deductions aren’t a factor; they were the same for all three segments. We then decided to find out the values of these particular intermediates, minivans and pickups as a percentage of their original costs during the 16 through 50-month service lives studied. That produced some revealing results as shown on Graphs 4 and 5. Graph 4 illustrates the used values of models A1, B1 and C1 expressed as a percentage of their original costs. Pay particular attention to the percentage values of all three models at two years. At 24 months/48,000 miles the A1 intermediate retains 53 percent of its original value. Meanwhile the B1 minivan retains 68 percent of its original cost, a good 15 percent more than A1. At 24 months/48,000 miles the C1 pickup truck retains 69 percent of its original cost, 16 percent more than the A1 intermediate.

The minivan and pickup retain much more of their value at 24 months over the intermediate. But as we project forward from 24 months, the gap between the A1 intermediate, B1 minivan and C1 pickup closes. The value of the pickup and minivan decreases at a greater rate. Thus their depreciation expense at 24 months is less than any other point forward in their service life. Yet the A1 intermediate’s depreciation expense lessens on average from that point forward. Graph 5 illustrates the same retention percentage of original cost as Graph 4 for models A2, B2 and C2. Here the disparity between models at 24 months is even more pronounced. The A2 intermediate sedan retains 62 percent of its original value at 24 months/48,000 miles. In contrast, the B2 minivan retains 82 percent of its original value at 24 months, 20 percent more than the A2 intermediate. The C2 pickup retains 81 percent of its original value.

Again, a gap in percentage of retained original value persists through service years three and four between the A2 intermediate, the B2 minivan and C2 pickup. That gap closes from 24 to 48 months, dwindling from 13 to 6 percent.Once again the extremely high value of the minivan and pickup at 24 months equate to a lower depreciation cost per month than the costs at 36 and 48 months. Certainly other factors contribute to optimal resale time such as season and model redesigns and changeovers. But the results of this study show that it pays to take a closer look at the depreciation of particular makes and models before assuming that retaining vehicles longer will result in the lowest net depreciation.
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