Sunday, April 21, 2013

Depreciation: Understanding the puzzle of resale and residual value

It was in a discussion about NBN and the experience curve that I got this interesting comment about my "can't afford a new car" analogy:

Say you were expecting two more kids in the coming year, could you really stay with the Barina? Or are you actually needing to reassess the use of your car to a larger model. Does it make sense to buy an older larger car that will need replacing after a few years, or to get a new car that will still have a good resale value once the first batch leave the nest?

Cars are a money trap
Haha! I don't need to imagine that one! I did it. In 2003 as we were expecting Jonah, we couldn't afford it but took a $19,000 loan to buy a relatively new Ford Falcon. Three years later I got $7,000 for it. I still have the $19k sitting as a debt in the account. The losing of value is the reason we have this accounting device known as depreciation. I know, as a young man I always dreamt of my car increasing in value but it wasn't gonna happen with a 1978 Torana, more like a Rolls Royce or a 1934 Dodge.

I'm sick of thinking NBN for now
Still, the young guy had put up his own straw man argument. And I'm tired of thinking NBN for now. I got the best "pro" NBN argument from a clever guy called Ryan Kris the other day and will process that for a while. What's not adding value are simpleminded "tin can string" jokes as the revenue base (carbon tax and mining tax) have both been crippled.

Aircraft may be different
Interesting though. I did want to talk to a friend who owns aircraft. I've always believed "if it's got wheels it loses money" and aircraft (technically) qualify. But I remember someone saying that "there's no such thing as an old aircraft" because every part gets replaced sooner or later. Sure enough, the 1975 Cessna 206 has increased in value over the 13 years my friend has owned it, but I shudder to think how much maintenance has cost. So the depreciation expense is down, but maintenance expense is up.

Property has its quirks
So my pilot friend said "it's never as good as property" which on the whole tends to appreciate, with flat spots. And you can earn an income from it. But it think he might have a better "asset to earnings" ratio on his plane than a house. But what a headache. Still, being a landlord is a headache.

Sunday pre dawn musings.

- Posted using BlogPress from my iPad

1 comment:

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