What is Depreciation for Cars?

Car Depreciation Rate Table

Let us have a look at a rate of depreciation table for a car whose details are as follows:

Purchase Value = $40,000

Estimated years after which car will be sold = 5 years

Refer to the following table –

Thus, the value of the car after five years is expected to be $15,222.68.

How to Calculate Depreciation for Cars?

DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more of a car can be calculated on the following formula:

A = P * (1 – R / 100)n

D = P – A

Where,

  • A = Value of the car after a period or n number of yearsP = Purchase value of a carR = Rate of depreciationRate Of DepreciationThe depreciation rate is the percent rate at which an asset depreciates during its estimated useful life. It can also be defined as the percentage of a company’s long-term investment in an asset that the firm claims as a tax-deductible expense throughout the asset’s useful life.read moreN = number of years after the purchase of the carD = Depreciation

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Example

Let us understand the calculation by way of the following example.

A car depreciates at a rate of 15% per annum. The car is purchased for $30,000. What will be the value of the car after four years?

Solution:

Calculate the value of a car after four years:

Value of car after 4 years is A = $15,660.19

Now Calculate the depreciationCalculate The DepreciationThe Depreciation Expense Formula computes how much of the asset’s value can be deducted as an expense on the income statement. Formula for Straight-line depreciation method= Cost of an asset - Residual value/useful life of an asset.read more after 4 years:

  • = $30,000 – $15,660.19= $14,339.81

Factors Affecting Car Depreciation

  • Several ownerships: The greater the number of previous ownerships, the greater the depreciation rate. Thus, it is always advisable to check for previous owners in case you plan to buy a used car.Mileage: A car with higher mileage will lower the value of your car, and the resale value will be less.Service and Maintenance: The value of a car will be better if the same is well maintained and service is done timely.Warranty: A car with a longer warranty will attract more resale value.Popularity: Let’s say a car is popular and is desired by people for a longer period. Then the car resale will be more than those cars which go out of demand in a few years.Car size: The cost of running is higher in luxury cars or big cars, and hence, they depreciate faster than smaller cars.Maintenance: If the cars are not maintained regularly, then the cars will tend to depreciate faster.Condition of Car: The car which has been damaged due to an accident or any other reason, its value will start to diminish.

Conclusion

Depreciation rates may differ for various models and types of cars. Also, the rate at which a car depreciates depends on numerous factors, as described above. Further, the car’s value is reduced, starting from the first day of purchase, and such reduction continues over its life.

This article has been a guide to what depreciation is for cars. Here we discuss calculating car depreciation and its rate, along with examples and factors affecting it. You may learn more about financing from the following articles –

  • Unit of Production DepreciationMACRS DepreciationCalculate Accumulated DepreciationDoes Land Depreciate?NOPAT