A Different Way Of Looking At Car Resale Value

If you live in Kenya, you are definitely familiar with the idea of car resale value, which is a huge part of the Kenyan car buying experience. A significant part of the car owning population buys second hand imports from Japan (typically 5-7 years old), with a view of driving it for may be 3-6 years, then replacing it with a newer second hand car.

Typically, Toyotas are beloved because they have a higher resale value, and as a result, they also tend to be more expensive than most of the other models.

Now, I’ve been thinking of disposing my Mitsubishi which has served me faithfully for 6 years now. In the open market, it is worth 50-60% of what I bought it for, which isn’t unreasonable when you consider depreciation, but a Toyota would be worth may be 85% of its purchase value. Here’s how I’ve worked this out: I bought my Mitsubishi station wagon for 700,000 bob in 2009. At that time, an equivalent station wagon (Toyota Fielder) of a similar age and with the extras my car has was going for 1.2 million shillings. Today, my car resale value is between 350,000 – 400,000 bob, I figure the Fielder would go for 1 million bob maximum.

At face value, if I had 1.2 million shillings in 2009, which would be a better car to buy? All things held constant, the Fielder looks like the obvious choice.

But is it?

Let’s talk opportunity cost. By spending 500,000 bob more on a car, I am forgoing returns I would make if I invested that money elsewhere, and just went for the cheaper car.

I did a quick back of the envelope calculation of 500,000, invested in a corporate bond (for example), that is paying a conservative 13.5% annually in returns.  The table below shows the interest earned, and the cumulative interest over time.

This means that if I had invested the extra cash and I sold my car today,my bank account will have a total of  1,418,920 shillings (350,000 car sale + 568,920 interest + 500,000 principal).

The Toyota person will have 1 million shillings from the sale of his/her car.

Of course there are other considerations in the car buying decision like fuel efficiency, maintenance, utility and ego, but I thought it’s interesting that we never consider the opportunity cost of buying an expensive car which has a high resale value.  I also did not consider it, I just bought the car I could afford 😀