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The BMW Story, Part II: The Analysis

Contributed by mm | March 30, 2005 7:19 AM PST

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's appraisal.
- 9.1% sales tax will apply
- Some $350 documentation/licensing fee will apply
- Comparing the True Cost to Own (TCO) from (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 :-)

This Post Has Received 60 Comments. Share Your Opinions Too.

Flexo Commented on March 30, 2005

BMWs are great cars to own. Enjoy!

rob Commented on March 30, 2005

Get the car.
There is nothing wrong with buying a nice luxury car as long as you pay for it in cash.
That knuckle head who was crying about "prestige" is just jealous.
Get the car.

rich Commented on March 30, 2005

I agree. I have a practical car and an Audi A6. I understand the costs associated with owning a European automobile and am very financially conscious such as yourself. Just know that after going from a Kia to a BMW, you'll never go back.

JJ Commented on March 30, 2005

You should bump up the "$1,000 more on maintenance/repair" to "$2,000 more on maintenance/repair". BMW costs $150+ to do oil change and $500+ to do brake job.

Since they introduced free-maintenance in 2003, they are bumping up the maintenance to out of warranty car. Enjoy your new car.

mm Commented on March 30, 2005

Understood BMW is expensive to service. It's $1,000 and $2,000 "more [than Kia]", and I am accuring $720/year for maintenance and $1,500/year for depreciation. Make sense now?

Alan Commented on March 30, 2005

Maintenance is high to be sure but I assume the $150 rate on an oil change above assumes you take it to a dealer. I have 2 BMWs which I change the oil myself, but my mechanic charges about $30 on the occasions I've had him do it. Short answer - don't go near a dealer for service, find a reputable mechanic - contact your local BMW car club chapter for a recommendation

mm Commented on March 30, 2005

You are right Alan. Even my Toyota dealer only charges me $29.95 for oil change without any reservations.

Man Commented on March 30, 2005

Aren't BMWs slipping in quality surveys ? Hyundai is above BMW in rankings. A Coworker recently dumped his 5 series after too much in repair and maintenance bills and bought a Lexus.

To me the best car is the one with least breakdowns and maintenance costs. Corolla anyone ?

I thank god for BMW owners because its their dollars that pay for the sponserships of many fine TV shows

ZWH Commented on March 30, 2005

I would not drive a Kia but after having two BMWs (5 & X) I would say they have no place in someone garage that epouses financial planning. They are fun to drive. Really fun. They have horrible quality issues. REALLY HORRIBLE. I would venture say (as most FORMER BMW owners will agree) they are utter CRAP.

Stick with Toyota (or Lexus) and you will never curse at your car.

Mr. K Commented on March 31, 2005

I think it comes down to whether the effect of this single transaction will still allow to meet your personal finance goals. You have to have fun along the way, and if the BMW will bring you a little fun without throwing your budget out of whack, I say go for it. I bought a new loaded Maxima 3 years back and my TCO is 41k so far, so cars I persoanlly know are a huge cost, but I wouldn't want to be without it.

Jonathan@MyMoneyBlog Commented on March 31, 2005

Most importantly, are you driving the bimmer or is your wife? I'd go for a bigger engine than the 2.5L personally ;)


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