During the weekend, we made a few phone calls and researched a lot online. Our favorite dealer friend, who we got our Camry and Kia from, has a well-equipped BMW 2002 525i in stock and he is willing to offer us a special price of $24,500. We also intend to trade in our Kia (reasoning below). Of course, such a big-ticket item purchase cannot be done in our household without some financial analysis, and let me share our financial model here.
First, the data collected:
- Assuming we will get the BMW for $24,500. It's a nice price nevertheless, although we still expect some extra "customer loyalty bonus" :-)
- Assuming we will trade in Kia for $5,800 -- the price is from Edmunds.com's appraisal.
- 9.1% sales tax will apply
- Some $350 documentation/licensing fee will apply
- Comparing the True Cost to Own (TCO) from Edmunds.com (2002 BMW 525i vs 2002 Kia Optima LX V6), the machine from Germany will depreciate about $2,000 more every year, and maintenance/repair cost bill will run $1,000 higher on average for the first two years.
- Our insurance agent ran an estimate for us. To our surprise, BMW only adds less than $30 to our annual insurance premium.
By piecing all these information together, I can look at the full picture in two categories. I will incur some one-time expenses like sales tax and licensing fee, and moving forward, my annual cost of (car) ownership will also be higher. Here is the breakdown:
One-Time Expense: ~$2,950
- By trading in Kia at $5,800, I will take a book loss of $900 (Kia is valued in my accounting book at about $6,700 right now -- the price is mostly based on private party price.)
- At the same time, I can reclaim my maintenance reserve for Kia, now worth $247.
- I will pay 9.1% sales tax, but only on the difference between the BMW sales price and Kia trade-in price. That amounts to $1,700. (That's part of the reason why I may choose to trade in for less hassle -- the trade-in actually offers $500+ credit in sales tax.)
- The sales tax I will pay is also deductible. At my expected 2005 tax bracket of 28%, it is worth $475.
- Licensing fee for $350.
- CarFax fee for $24.99 (CarFax is a good resource to identify used-car lemons)
- I will add $200 to build my initial maintenance reserve and record an initial depreciation of $500 upfront.
Annual Incremental Ownership Cost: ~$3,900
- $1,000 more on maintenance/repair
- $2,000 more on depreciation
- BMW 525i consumes premium gas; another $120 blow a year
- $26 more on insurance premium every year
- Cost of capital: as I will pay out $18,700 excluding tax and licensing for this deal, assuming 4% cost of capital (a big higher than the current saving rate of 3.25% at EmigrantDirect), I will essentially be $750 worse off every year.
So, we are talking about $11,000 in two years. With a number associated, it is easier to decide whether it is worth the temporal satisfaction. Admittedly, the cost is a bit steep, but we are now expecting to earn much more than this figure compared to our original income projection. It is going to be a good bedtime discussion :-)