Wise or Unwise Redux (Running The Numbers)

[chopsuey34]

In a recent thread, a man named Josh asked if he should sell his Si and buy a Type R. Looks like everyone already helped talk him out of it, but I noticed that not too many numbers were thrown around. It got me thinking, how much money are we actually losing on our cars? After all, the saying goes that the moment you drive a new car off the lot, you lose 30% of the car’s value instantly. I wanted to test this to see if it’s actually true so I ran the numbers. I wanted to answer Josh’s question with hard numbers and also want to inform forums members about how much their cars actually cost and how much these cars affect their net worth. Let’s get into it:

(Disclaimer: This post is for entertainment purposes only. It is not intended as financial advice. Don’t take financial advice from strangers on the internet.)


Scenario #1 (Stock vs. Stock):

This baseline scenario compares buying a stock Si compared to a stock CTR and will serve as a starting point for other scenarios to get readers familiar with the concept of taking projects and net present value. Both cars in this scenario are treated as projects that are sold at the end of the 5-year holding period. All future cash flows are tallied and discounted back to the present to calculate net present values. Assumptions about the future are listed at the bottom of the post.

First up is the 2025 Civic Si. Based on certain assumptions, if you are a midwestern man in his 30’s, with a clean driving record, and good credit, and you intend to finance your Si at 8% for 5 years and sell it the moment it’s paid off, your net worth immediately falls by $35,813. That’s horrible! The moment you sign that title, all of your operating and financing costs over the next five years (once they are discounted to the present) add up to a net present value (NPV) of negative thirty-five thousand, eight hundred, and thirteen! Forget about a 30% immediate loss from driving a new car off the lot! The moment you undertake this 5-year project, you lose 105.3% of the Si’s value.

Up next is the CTR. Following the same assumptions (with appropriate adjustments for insurance, gas mileage, etc.), the net present value (NPV) of the CTR is -$45,110. Again, the moment you sign that title, your net worth immediately falls by $45,110 once you add up all financing and operating costs over the next 5 years and discount them to the present. The moment you buy a CTR with the intention of holding it for 5 years, you lose 90.7% of your CTR’s value.

Discussion:

Cars are expensive. Everyone with a car payment intuitively knows this. Everyone who has sold his car at a deep discount to MSRP after some amount of years knows this. But even I was surprised at how large of a chunk of net worth a new car bites out of someone’s net worth.

What is interesting is that the CTR loses more money than the Si with the NPV criterion, but its return on investment and internal rate of return is better than the Si’s. This is mostly due to the CTR’s lower depreciation value compared to the Si. The CTR is expected to retain 72% of its value compared to the Si, which retains only 62% of its value after 5 years.

Your car’s selling price is typically the only cash inflow generated over the life span of a car. No wonder youtubers love pumping out videos about their cars. The videos create an income stream that helps offset the value loss. The additional content drives the algorithm, and enables them to buy more expansive cars. Thus, the content cycle is born!

People and businesses don’t get rich taking negative expected value projects. But you know what, the open road is calling, and there are base model Ecoboost Mustangs to be smoked! Someone’s gotta do it!




Assumptions:

Total costs are calculated with MSRP + $1,095 shipping, 6% taxes (Michigan), and $600 dealer fees

Loan: 5-year term @ 8%, 20% of total cost down payment for conservative financing purposes, zero trade in value (no salvage value of previous car assumed)

Interest Rate & Discount Rate are 8% because that is a conservative expected interest rate for a performance Honda due to rarity (compared to something like a CRV – Honda is pumping them out) and also because that is the long-term historical return on investment with an S&P 500 index fund (opportunity cost of equity).

Insurance: Auto quotes for Si and Type R sourced from a leading insurance company for a 30’s male driver in Michigan with a clean record and a super prime credit score. All coverages and information are held constant. Insurance costs assumed to increase at 5% per year post Covid / inflation.

Gas: 12,000 miles per year with constant $4.75 / gallon using Si combined MPG of 31 and Type R combined MPG of 24. Gas price held constant for 5 years because forecasting gas / crude prices out 5 years is impossible.

Maintenance: Two oil changes & one cabin / engine filter change per year for both cars (no labor costs, self-maintained). Prices assumed to increase 5% per year.

Registration: Michigan registration costs estimated based on MSRP and weight of vehicles (I’m probably wrong here, but I tried my best).

Mods: Strict budgeting and assumed ROI of 0% because buying mods is throwing money away.

Selling price: Estimated through taking an average of 1) identical KBB inputs for hypothetical 5-year-old Si’s and CTRs and 2) Autotempest.com figures for 5-year-old Si’s and CTR’s in good condition in a 300-mile radius around Michigan. Possible overstatement since the used market for Hondas is still high. Note: various geographies (California, Kansas) will have greater / lesser resale values.

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[chopsuey34]

Scenario #2 (Josh’s Question):

So, Josh, to answer your question, should you buy a CTR? Here are the numbers. First, I estimated your trade-in value as an average between with KBB and Autotempest using a North Carolina zip code. Both agree that your Si should trade in for $20k because of your higher mileage. Then, I the estimated incremental cash outflows if you traded in your Si for a CTR (lower mpgs, higher insurance, new financing, etc). For example, since you drive 42,000 miles a year, your gas costs have been moved to their top ranges to incorporate mostly highway driving (28mpg for CTR, 37mpg for Si). Your maintenance costs have been increased by 4 times to account for the mileage and still increase by 5% per year. Here’s the chart:

Josh, your expected value over these seven years is negative $105,420 dollars. It’s probably more than that. Let me explain how I got there. I assumed you financed your Si for two years since you stated you paid it off, and I also assumed you didn’t have a down payment (I assumed you were broke since you just got a good job just as you purchased your Si). Driving a lot really hits you. Even with 37mpg, your gas expenses are really high. Over two years, your Si project has cost you $46,650. If you were to buy a CTR, I assumed you would apply the $20,000 Si trade-in towards the $49,725.70 cost of the CT and finance that over 5 years. Again, I adjusted the CTR gas and maintenance numbers to fit your higher yearly mileage. In 2029, after 5 years with the CTR, I tried my best to estimate a selling price but unfortunately, such a market doesn’t currently exist: The highest mileage CTRs nationwide (via Autotempest) only have about 100,000 miles, while your CTR would have 220,000 miles @ 5 years & 42,000 miles per year. I threw you a bone by estimating a CTR selling price using 100,000 miles, but let me be direct: you’re going to lose more money than this model says because a 5-year-old CTR with 200,000 miles will be worth less than a five-year-old CTR with 100,000 miles.


Counting up the cash flows, your total net present value in 2022 for this Si-CTR project is negative $90k. However, we need to bring that to 2024 by compounding it forward by 8% for two years. This gets you to your overall value of negative $105,420.60.


Josh, this is the direct answer to your question: You are already out a lot of money with your high mileage Si, but if you trade up to the CTR, your net worth falls by $105,420 using reasonable assumptions about the future. Josh, if you buy that CTR, you must hate money and getting rich and saving for retirement. I wanted to model this out for you and for all other forum member so you know how your net worth changes by trading up to a CTR.



To drive the point home, I’m going to assume you are 25 on a whim and that you plan to retire at 65. With the S&P 500 returning a long-term average of 8% a year, you are making your 65-year-old self poorer by $2,290,220. Think about that the next time you think about buying a CTR. The money you put into your cars can be put into your retirement account. This goes for everybody. The opportunity cost of smiles per gallon is astronomical.

(105,420) x 1.08 ^ 40 = $2,290,220



I’m guessing that you drive a lot for work or something. With your high mileage, I would recommend buying something really cheap and fuel efficient, like a base Corolla or something. Or buy a base model Prius. Or even a used Prius, God forbid! Simply put, you are bleeding money putting so many miles on your car per year. Your trade-in prices are getting hit too hard with the miles you are putting on your cars. Maybe don’t drive as much?




This brings me to my next scenario: is it better to buy a car for shorter or for longer??

 

[chopsuey34]

Scenario #3 (length of ownership):



Typical wisdom in car ownership (and /r/personalfinance) says to buy a car and hold it until the next ice age. Let’s test that rule of thumb. Let’s run the numbers for holding a Civic Si for 3 years compared to holding it for 8 years.

Well, which one is better, a 3-year NPV of -$21,400 or an 8-year NPV of -$48,300? Well, with a financial calculator, I can figure that one out. With my work show below, I have determined that buying a Civic Si for 3 years is actually better for your wealth than buying a Civic Si for 8 years. What a surprise! Take that you broke-ass, used-Camry-buying, personal finance losers! I’m going to be a degenerate and buy a car every three years. I’m losing less money, my dealer loves me, my woman loves my new rides, I feel like the man!



3-Year Si
PMT = -8,302.36 (this is less negative than -8,407.16, so it is the better project, but not by much)
PV = -21,395.98
FV = 0
N = 3
% = 8

8-Year Si
PMT = -8,407.16
PV = -48,312.94
FV = 0
N = 8
% = 8


Hold up, cowboy. This data is backwards looking. We’re interested in the future, not the past. The used car market is still elevated post Covid for certain OEMs. While some manufacturers like Dodge/Jeep are up to 131 days inventory and are already discounting new models heavily, Honda and Toyota are still at 29 and 33 days, respectively (Source: Cox Automotive).

Since I’m not willing to spend two weeks doing an in-depth industry and inventory analysis (I don’t get paid for this), this is the part where I make up a narrative and go off the cuff. Once Civic inventories rise, the used market for these cars will normalize. Remember the days when there were 4 Si’s sitting on your local Honda dealer’s lot and you got money on the hood? While it has been economically optimal to own cars for shorter times in the past few years, the risk with continuing to frequently cycle through cars is that Honda’s inventory will eventually normalize and the historical depreciation curve of these cars will return. As the inventory chart shows, inventories are normalizing for most OEMs and the quick cycling of cars will most likely become a money losing strategy compared to buy-and-hold once the historical depreciation curve sets in (see fig. below). I don’t know when this will be, but it ain’t 2021 no more! Buyer Beware! The CTR may be an exception to this because demand for that car seems like it will always surpass supply.

Covid was the time to cycle through cars every 1-2-3 years as long as you didn’t pay above MSPR because trade-in values were historically elevated. Personally, I regret not buying something and selling it 1-2 years later for higher than what I paid for it. I work with a guy who did that with an M3. He drove that M3 “for free”, but once you factor in financing, gas, insurance, dealer fees, taxes, etc., he still lost money, just not that much.



If you bought a new car every year during Covid, I am kind of jealous depending on the prices you paid and received.

 

[chopsuey34]

Scenario #4 (after-market modifications):

Listen, I get it. You got that flashy, new car to be your group’s big swinging dick and to get laid (hopefully). But Joey just got himself a WRX with a COBB tune, so how do you one-up him? The answer involves throwing your money down the drain by “investing” in mods. Is there anything stupider than buying expensive parts that ruin your car’s warranty? There isn’t, and I’m guilty as charged for falling for the young man’s stupidity tax.


Car enthusiasts waiting for April to apply their tax returns for an expensive mod know how much dosh it takes to treat their baby right. “If you wanna be the boss, you gotta pay the cost” rings true now as it did generations ago. With that in mind, let’s model a situation I’m going through right now: should I buy a Civic Si and invest lots of mods into it, or should I stretch for a CTR and spend less on mods because the CTR is a lot more capable out of the box?


First, the major assumption: the ROI for modifications is assumed at 0%. I know people sell their parts on this sit, but until someone comes up with an itemized list of all costs and recouped money for their after-market parts over a car’s life so that a return can be calculated, the assumption is 0% (Note: I think I might be the only car enthusiast on the planet who can come up with such a list and my historical return across 3 cars is essentially 0%).


My budget for mods is strict and represents the highest amount of money I am willing to spend. Unlike other addicts, I consider what I want and like, and then budget for my affliction and know when to stop (I swear). My Si mod budget tops out at $9,000 and includes a tune, intercooler, wheels, tires, accessories, etc. to turn it into the car I would want to buy. The CTR is a better car out of the box and so my mod budget falls to $4,500. Half that budget is wheels and tires, with a tune, RMM, and Acuity shifter, and a few other things making up the difference. That’s really all I would need for a CTR (I never track my cars, and if I did, I’d keep them stock anyways, save wheels, tires, brakes, and fluid).

Using the same 5-year models as in the first scenario, but adding $9,000 worth of mods for the Si and $4,500 worth of mods for the CTR, we find that the NPVs of the Si and CTR projects are -$44,150 and -$49,300, respectively.


There is only $5,000 difference in NPV. Which is why I’m conflicted. Maybe it’s worth that extra $5,000 and get the better car. In the first year, monthly running costs average $887 for the Si and $1,224 for the CTR. This $337 difference isn’t very large. A few commentators mentioned to ignore all these numbers and buy what I can afford. Well, I am very disciplined with my money (I swear) and I can afford an extra $337 per month. Maybe I should stretch for the Type R. As Ben Franklin once said: “so convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do”.




Discussion:

Modding your car is throwing your money away. If it gives you pleasure, it is an expensive way to do so. If you are an auto enthusiast, just forget you even read this and go “LA-LA-LA” to remain in blissful ignorance. And don’t remind me of the money I’m spending to support my habit.

Addendum: People who paid over MSRP for their cars “modded” them with non-visible, non-tangible widgets and threw their money away, too, unless they were able to get out of them at elevated trade-in values.

 

[optronix]

Slow day at the office?

 

[chopsuey34]

Slow day at the office?

Yup

 

[TypeR_Kevv]

Bro legit put a power point together

 

[Two Step Performance]

- > ?


...

 

[chopsuey34]

Bro legit put a power point together

It's what I do. No deals to get done for the rest of the week.

 

[Acropora]

Bored IB analyst?

 

[SilverRocket]

Awesome posts, great analysis however the assumptions make or break the cases. Change just one of the variables, especially milage, and you get wildly different results.

If you find yourself wanting to take a crack at v2, add the ability to plug in milage which would then apply more easily to people's specific cases with a few key strokes.

I know on my end (anecdotal) I bought a 2013 Civic Si for $33kCAD everything including local taxes in. Dropped $12.5k down payment and was lucky to get 0.99% on 4 years. Paid it off with only $417 interest so total cost was sub $34kCAD.

Drove it for 11 years, not many miles per year, so 1 oil change per year and new filters every 2. My 11 year total maintenance (mostly at Honda) was around $6500 and this includes a set of summer and winter tire noting i splurged on PSS summer tires and a $1100 cat back Q400 when I could have fixed the exhaust leak due to rust for $100 at my mechanics.

When I was allocated my ITS, I looked to sell it and other examples of 10 year old, 60,000 mile (100k kilometer) were selling for around $20kCAD at the tail end of COVID craziness. I got a private offer for $15k but in the end I couldn't part with it. MSRP was $26k in 2013, so I was getting over 50% 10 years later and that was a market lowball. Another anecdotal aspect, sure, but goes to show just how widely things can swing in the future.

 

[chopsuey34]

Awesome posts, great analysis however the assumptions make or break the cases. Change just one of the variables, especially milage, and you get wildly different results.

If you find yourself wanting to take a crack at v2, add the ability to plug in milage which would then apply more easily to people's specific cases with a few key strokes.

Such is life, with DCF analysis, assumptions make or break the analysis. Gas could fall to $2.00 tomorrow or go to $7.00 for whatever reason. Monte carlo analysis can model that, but I don't have those plug-ins in excel anymore.

As for gas and mileage, higher yearly mileage and higher gas prices favor the Si, while lower mileage and lower gas prices favor the CTR. But mileage doesn't really affect NPV all that much.

When comparing stock to stock, it's a fairly linear trend from -5,000 to +5,000 miles from national average of 12,000 miles per year.

Mileage	7000​	12000​	17000​
CTR NPV	-41159.38​	-45110.5​	-49061​
Si NPV	-32754.64​	-35813.57​	-38872.5​
Delta	-8404.74​	-9296.93​	-10188.5​
	892.19​	891.57​

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