Originally Posted by
Roody
I'm fairly confused by now, but I believe this is exactly what his calculator does, that I and others disputed. The "right" way to do it is to figure an expected depreciation rate based on the estimated future resale value of the car. Not to determine the depreciation rate between time of purchase and the current moment.
Actually, a co- worker with a background in business just told me that depreciation isn't even the right word. "It's an expense, but it's not depreciation." But it's way too late at night for me to try to figure that out!
It is an expense. The expense occurs on Day 1 when you drop $10,000 on the desk of the person selling you the vehicle. After that, there is no further expense.
If you're fortunate, you may recoup some of that $10,000 at a later date when you sell it. That would be a positive thing. But you have absolutely no way of knowing what might happen, so as far as you're concerned, the vehicle cost $10,000.
And if you want to think of that cost in monthly terms you can calculate that. If you have already owned the vehicle for 4 years, that's $2500/year = $208.33/month.
Depreciation is just the reduction in the value of an asset over time. If you've paid $10,000 up front, you don't keep paying "depreciation" costs throughout the time you own the item. You don't pay $10,000 on year 1, then on year 2 when the vehicle has depreciated by $2000 to $8000, you don't pay anyone the $2000 depreciation. The depreciation amount doesn't matter. No one cares. It's just an imaginary amount.
Until you sell the vehicle. And then the imaginary amount suddenly becomes a real amount. But you don't pay the depreciation amount, you receive an amount to offset what you paid for the vehicle in the first place.
Depreciation comes into play when you estimate the amount you want to sell the item for. If you assume that the $10,000 vehicle has depreciated $4000 over 2 years, you might put it up for sale at $6000. That would likely be the "book value" of the vehicle. Whether you get $6000 or not is another matter entirely. If you sell it for only $3000 ... your estimate of $4000 depreciation means nothing.
The other place it comes into effect is in taxation, capital gains tax, etc.