Exponential Functions Name:_______________________________________

through Car Depreciation

What is car depreciation?

Article by John Fuller
https://auto.howstuffworks.com/under-the-hood/cost-of-car-ownership/car-depreciation.htm

Some things in life experience an unfortunate decrease in value after they're purchased.
There are several reasons for this, including age, wear and tear or even market
conditions. A furniture set you purchased for your living room may look great for several
years and serve its purpose for a while. But if you're moving to a new place and maybe
looking to upgrade to a bigger set, you most likely will be selling your used furniture for
less than you bought it. Scrapes, bumps and stains further decrease the set's value.

This decrease is known as depreciation, and it's a word that causes most new car
buyers to shudder. Unless a car is a rare or classic model that often end up going for
hundreds of thousands or even millions of dollars at an auction, the majority of vehicles
on the road depreciate, no matter what the owner of the car does.

There are a lot of things you have to consider when buying a new or used car -- the
costs of gas, car maintenance, taxes and insurance are just a few of them. But another
important thing to keep in mind when thinking about purchasing a car is car
depreciation. In this article we'll learn why cars depreciate, how much you can expect
cars to depreciate (in general) and what to look out for when buying a new or used car.

Off the Lot: Why Cars Depreciate

Car depreciation is a tough thing for many people to keep in mind while they're
shopping for a new or used car, or even when they're just maintaining the car they
already own. It seems there are already enough immediate concerns you have to worry
about while operating a vehicle. There are questions about car insurance, there's that
annoying grinding noise coming from the front right corner and even simply monitoring
how hot or cold your engine is running and watching how much gas is in your tank
usually seem pretty important, too.

But car depreciation is always there -- in the background. It's even despairingly referred
to by some as a "silent thief" because of the manner in which it continuously reduces
your return on investment in your car.

The standard for car depreciation is that all cars, in general, lose about 15 to 20 percent
of their value each year. So a car that's three years old will become worth about 80 to
85 percent of the value the car held as a two-year-old car. The next year, when the car
is four years old, it will become worth 80 to 85 percent of the value the car held as a
three-year-old car, and so on.
So, for example, let's just say you bought a used car that after one year is worth
$15,000. This particular car loses 20 percent of its value each year. So, after its second
year in your possession, the car would be worth about $12,000. The next year, the car
would be worth 80 percent of that two-year, $12,000 value, or $9,600.

The first year tends to be the steepest drop. In fact, the moment a new car is driven off
of the lot, depreciation sets in immediately. Why is this?

There are a couple of reasons. Initially, you pay a retail price for a new car: whatever
amount the dealer is willing to agree to in order to sell you the vehicle. The moment
you're on the road, the car is instantly down to its wholesale price. In other words, the
price that someone else would pay to buy it from you. This depreciation is typically
thousands of dollars. On top of that, the money you spent on taxes and other licensing
fees is gone, too.

So is there anything car shoppers can do to alleviate the pain of depreciation? Well,
understanding some of the variables that determine car depreciation helps. Cars that
maintain a high demand and are in low supply typically have better resale values. Some
brands also depreciate less than others, and of course the condition of a used car will
affect its resale value. In the end, it's best to just accept the fact that most cars
depreciate and there's not much (if anything) you can do to stop it.

Reflection questions:

1) In your own words, define or describe depreciation.

2) What does your family own, besides a car, that might depreciate in value as soon as you
buy it?

3) What are some reasons that car values depreciate?

Application Questions:

4) The article gives an example of a $15,000 car having a projected value of $12,000 after
1 year. Its projected value will decrease to $9,600 after 2 years.

a) What do you think projected value means?

b) What growth rate models the depreciation illustrated in the example?

c) Did the author arrive at the correct projected values? Prove your conclusion by
conducting and showing your own calculations here:

5) The article says that cars depreciate about 15-20% per year. Let’s say your new car
depreciates by 17.5% annually. What growth factor (a.k.a. growth rate) models this
percentage?

6) If a sales person let you choose the growth factor of your own car, what would you want
it to be? Why?
7) Melik wants to buy his first car, and he finds a new one that is $18,000. Knowing it will
depreciate by 18.3% each year, help Melik figure out how much his car will be worth after:

a) 2 years

b) 5 years

c) 10 years

d) How long will Melik own the car before it’s worth nothing?