W17_RW_When Should I Replace my Car


Disclaimer: All value in this blog is not real, it used to simulate to determine the economic life calculation.

Problem Statement:

I just bought 3 years old used car, this car was bought with $20,000 it was in good condition, from the manual book I see there is a potential to replacing some major spare part beside the routine preventive maintenance. The detail data shown in table below, assume I have 15% personal interest rate per year. When should I replace this car?

Feasible Alternative:

  1. Continue using that Car until it cannot be used
  2. Replace the car at certain year to get the best economic value

Tools and Techniques:

From Sullivan’s Engineering Economy 15th Edition, chapter 9, section 9-6, Determining the economic life
Selection Criteria:

Equivalent Uniform Annual Cost (EUAC) > total margin cost is the best choice.

Calculation:

Deterimine the potential loss in Market value and cost of capital to get the total marginal cost.

Marginal Cost = Major Maintenance + Preventive Maintenance + Loss in Market Value + Cost of Capital

And now calculate the EUAC with 15% MARR.

 

The conclusion:

Using the car until it scrap is not a right choice at it will drain your pocket for increasing maintenance cost and lowering the market value. Sell the car at the 2nd year and purchase the new car is a good choice, in term of economic value it is the optimum years where we can get the reasonable market value compare with the maintenance cost, where the total Marginal cost is less then the EUAC (15%)

References:

Sullivan, W.G., Wicks, E.M., Koelling, C.P. (2009). Engineering Economy, Fifteenth edition. Pearson International Edition, 2012, Chapter 9, section 9-6 pp 391.

“Operation Research Model and Methods” retrieved from: http://www.me.utexas.edu/~jensen/or_site/models/supplements/netmodel/S1_ecolife.pdf

“Equivalent Annual Worth” retrieved from : http://www.oup.com/us/pdf/engineeringecon/Chapter06.pdf

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1 thought on “W17_RW_When Should I Replace my Car

  1. Nice posting, Pak Ridwan!!! You provided 3 references and you selected a case study from your personal/work life which shows you can adapt this tool/technique to use in other situations.

    My only concern is that you still haven’t fully mastered the use of our Step by Step process. How are you planning on monitoring your decision to see if it was or was not a good one? Supposing your MARR changes from 15% to some other number, + or -?

    See where I am going with this? If you make decisions and don’t have any way of monitoring or controlling them, you are creating an unnecessary risk problem.

    Keep up the good work, but don’t forget for your W20 and W21 blog postings I will be looking for you to share your “Lessons Learned” (Technical in W20 and soft in W21)

    BR,
    Dr. PDG, Shanghai, China.

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