How to Calculate the Depreciation of a Car

Calculating depreciation will help determine how much a car is really worth.

If you are considering selling or buying a car, you will want to know how much the car has depreciated since it was new, or how much less it will be worth when you decide to sell it years from now. Car depreciation depends on several factors. A common estimate is that a car depreciates at least 20 percent in value as soon as you drive it off the lot, and another 20 percent per year after that. The value of the car over time will also depend on the popularity of newer models introduced by the manufacturer, consumer satisfaction ratings available from organizations such as Consumer Reports, and the average yearly costs of maintenance. Several on-line calculators will help you determine the depreciation of your particular model. But you also can use this simple formula, called linear or straight-line depreciation, which is commonly used to calculate car depreciation and can guide your research.

Instructions

1. Calculate the total cost of the car when it was new. Take the sticker price and subtract any dealer discounts or rebates and sales taxes. You also can use the blue book value of a similarly equipped model when it was new. Consider, for example, a car that cost $60,000.

2. Estimate the car's limited useful life. If you are trying to forecast how much a car will have depreciated in a given year, this is the age of the car in that year. For our example, we'll say we're looking at a car with a five-year useful life.

3. Determine what the car will likely be worth at the end if its useful life, called the salvage value. To calculate this, you can consider the resale price of similar makes and models after the same period. For this example, we'll say the salvaged value is $20,000.

4. Calculate the simple, or straight-line depreciation, using this formula: (Purchase price - salvaged value) / estimated useful life of the car = how much the car will depreciate per year. For our example, that would mean that the depreciation of a $60,000 new car with a salvaged value of $20,000 after five-year useful life, would be: ($60,000 - $20,000) / 5, or $8,000 per year.

Tips & Warnings

• Straight-line depreciation is one of several ways economists use to calculate depreciation, but it is the most common formula used to calculate car values.

References

• Connexions: Finance Grade 11
• Consumer Reports: What that Car Really Costs to Own
• National Motorists Association: Understanding Vehicle Depreciation