Fix or Not - Request for An Economic Analysis Methodology


#1

I’m sure that there must be some educated folks on Cartalk.com who can provide some objective way to determine if it’s economically reasonable to fix a car or not based on the age and value of the car and the type and cost of the repair.



I don’t mean a hand waving discussion or a shoot-from-the-hip guestimation, I mean some mathematically sound way to analyze it and make a choice.



Any takers?


#2

We just recently had a post on this. IF the vehicle is safe, will meet emission tests, it is not corroded to the point where you are embarresd to drive it and you can still get parts for it, only then you should do an economic evaluation.

  1. If any repair costs more than 30% of what the car is worth, be careful, and estimate what other repairs may be in the near future.

  2. Always compare repair costs foreseen to the cost of a good 3 year old replacement vehicle, not a new car. If you compare it to a new car, you may be forever replacing parts, but be driving a very substandard car compared to a new one.

  3. If you really love the car, and are used to driving it, you may want to keep repairing it, if it is affordable. There is a lady in my town who is 85 years old and still drives her very reliable 1967 Ford Galaxy.

In industry, you perform a Discounted Cash Flow and Equivalent Annual Cost analyis to determine the selling point. Here is a simplified version for personal use:

To do this, estimate what the total operating cost of the car will be for this year; gas, insurance, routine maintenance, including estimated repairs. Also do this for next year. The average of these 2 years wil be your old ownweship costs. If the car is old, forget about depreciation if the car is old.

Then price a good used car, and spread the depreciation over 10 years ( a $10,000 car over 10 years is $1000/year.) To this add gasoline , insurance and a nominal $300 per year for maintenance. Business also adds the cost of capital, say 8% of the purchase price ($800/year) to the new ownwership cost. You can readily see that the new depreiation of $1000 plus the $800 capital ownership cost gives you $1800 per year you can spend on EXTRA repairs over and above routine maintenance. So, if your anticipated repairs for the next 2 or 3 years exceed $1800/year in this case you should get rid of the vehicle, and buy a good $10,000 used car.

As others will no doubt point out, you have to figure what other repairs are in the near future. If the total of these exceed the current value of the car I would say goodby.

As Tom and Ray often point out, a $1200 repair spread over 12 months is only $100 per month. If you have no car payments, and the car is basically good, it certainly beats $400 per mont in car payments for a replacement. That reasoning is not exactly correct, but it help focus the listeners on the other ownership costs.

Hope this helps.


#3

Docnick has given you very good information.

One important item is how the car is used. If one is an over-the-road salesperson who depends upon the car, it may be economical to turn the car in when it reaches the stage that it needs tires. At this point, the battery may be getting tired, the brakes may need attention, and so on. On the other hand, if the car is being used around town to run errands and down time isn’t critical, it may be prudent to make more expensive repairs–e.g. transmission overhaul if it doesn’t exceed 30% of the value of the car and other systems in the car are in good shape. Taxicab fleets in large cities keep careful track of repair costs and regularly turn the fleet over. Rental fleets have a mileage/time interval at which they replace a vehicle. I am employed by a major university and I have never been assigned to an over-the-road vehicle that had gone more the 70,000 miles.

Another factor on maintenance is whether one is willing or able to do certain things for himself or herself–replace brake pads, change fluids, etc. My brother has a plumbing firm and buys used vans that may have gone 150,000 miles. He is able to do many of the repairs himself and has an independent shop for major work such as a transmission overhaul. He feels through careful mainenance that he saves money over purchasing new vehicles. He depends on the vehicles for his business and has very little down time with them.


#4

There are some educated folks who write things here. I’m always finding the simplest formula that requires little thinking. I start at about 1990 and 140,000 miles for cars with a bad reputation throughout their history. Anything in the eighties like a Ford Tempo, Taurus, or Cavalier, Neon, Citation, Mitsubishi, Mazda will usually get my disapproval. Then there are the Bonnevilles and Grand Prix cars. Sometimes, the owners of these cars really are welded to the frame for financial reasons. They don’t always come out with the information right away. I usually guess that the problems with older cars are just starting and my advice is to get rid of the car based on what disaster could occur next month. Even if it is running alright and the only problem is that the registration is expiring, I would give the advice to move on to your next vehicle. Often, the repairs are worth more than the car, That’s where I draw the big line for people who need reliable transportation and can afford a newer car. Some people don’t mind if the car doesn’t run for a few days. The requirements are individual and the measuring devices are on a slipping surface and there is often the odds that don’t act the same with every car. Good luck on your quest.


#5

There are just too many variables to come up with a accurate formula. Experience counts here.

BTW my training and professional life for 30 years has included doing this kind of stuff. Sometimes a good experienced guess is best.


#6

As any cost engineer will tell you, “the economics are ‘site-specific’ or event-specific” In other words, follow a general line of rational analysis, as outlined, but let personal considerations influence your final decision! The OP wanted not so much a rigid formula as a method to make a good decision.

I advise many friends and relatives on car purchases and when to trade or scrap, and there have not been two identical recommendations. The most important consideration, as Triedaq mentioned, is how the car is used, and the risk and cost of a breakdown. If the car is used for business, appearance is usually the main driver.

If the car is used in a non critical application, then decison is when not to send good money after bad. That decison can be made with a $10 hand calculator.