How to Crunch the Numbers on Replacement Cycles
Chart 1: The depreciation averages in this analysis demonstrate the common rule of thumb that vehicles lose the lion's share of their value from the moment they're driven off the dealer's lot until year two, and then depreciate on a gentle slope thereafter.
It is an age-old question: Does it make financial sense to run fleet vehicles longer?
There are certainly many other considerations that weigh in on replacement cycles, such as cash flow and company image as well as type of vehicle, capitalized costs and, of course, how those vehicles are being used. But in a vacuum, since depreciation is a fleet’s largest expense, many fleet operators believe extending the replacement cycle will automatically lower a fleet’s fixed costs.
True, depreciation is steepest in the first year of a vehicle’s life, and the slope of the depreciation curve flattens moving forward. But because depreciation is only one factor affecting a vehicle’s total cost of ownership (TCO), extending hold times doesn’t necessarily result in a better TCO.
With this in mind, we asked the lifecycle cost experts at Vincentric to put together a cost-of-ownership analysis for replacing vehicles after three, four, five and six years.
Vincentric crunched the numbers for 25 popular fleet vehicles in the 2014 model-year — with fleet-centric trim levels — in the compact, midsize, large sedan, compact crossover and half-ton pickup segments. Scenarios of 15,000 and 20,000 annual miles driven were collated (Chart 2).
The Vincentric data measures eight cost elements for more than 2,000 vehicle configurations, including
depreciation, financing, fees and taxes, fuel, insurance, maintenance, opportunity cost and repairs.
Each month, Vincentric recompiles its database to take current market conditions into account. Data for this analysis was pulled on Jan. 28.
Breaking Down Costs
Looking at Vincentric’s eight cost factors, three move uniformly: insurance goes down while opportunity costs and fuel go up.
Opportunity costs represent the loss of potential interest earnings if the out-of-pocket expenses incurred by owning and operating the vehicle had been invested in a savings account.
Fees and taxes fluctuate because the first year incurs sales tax (in states that charge it), then some states charge fees every other year. Nonetheless, opportunity costs and fees and taxes are minor cost factors. Let’s pay closer attention to the larger ones: depreciation, fuel, repairs and maintenance.